Getting Around The Non-assignability Clause!
By Steve Cook
When I first started investing, contracts to purchase REO properties from banks were still assignable. Whenever I wholesaled a property, I signed a simple, one-page Assignment of Contract with my buyer which assigned my buying position in my contract with a bank to my buyer. Effectively, my buyer (the assignee) stepped into my shoes and closed the deal.
As more and more banks were burned by assignees who bought positions in their sales contracts but did not perform, they decided it was time to start to control the selling process and force the original buyer on a contract to purchase the property. Thus, they started inserting a “Non-assignability Clause” in their contracts, which goes something like this:
Since I was making a living by wholesaling houses, the non-assignability clause was a major thorn in my side. It was preventing me from closing deals, costing me money in the form of additional closing costs resulting from double (a.k.a. simultaneous) closings, and causing all kinds of headaches, often as we were approaching our closing date. Whenever I bought properties from private parties, the non-assignability clause wasn’t an issue, but the majority of properties that I purchased were sold by banks or by HUD, neither of which allowed buyers to assign their contracts.
As I like to keep my life simple and the clause was making my life complicated, I had to find a way around it. So I resorted to stealing...an idea, that is. I took a cue from the commercial real estate industry. As it so happens, in order to avoid paying the substantial transfer taxes which result from the sale of large, multi-million dollar commercial projects, buyers frequently request that sellers deed their property into an LLC (limited liability company) and then purchase the LLC. Upon discovering this, I figured if this worked for commercial real estate buyers, it could work for my buyers.
I decided that if I purchased my properties within an LLC, I could sell my LLC to my buyer instead of assigning my contract to them. As far as the sellers were concerned, the buyer (the LLC) on their contract remained the same. For example, I would submit an offer to purchase a property at 345 Harford Rd., making my offer in the name of 345 Harford, LLC. Then I would talk to my wholesale buyers about this property, offering to sell them 345 Harford, LLC as opposed to selling them the property. Their incentive to buy the LLC was the reduced purchase price that I could offer since I would save money on closing costs by avoiding a double closing (one closing from the bank to 345 Harford, LLC and another from 345 Harford, LLC to my buyer). If my buyer agreed to purchase the LLC, which in turn owned the contract to purchase the home, they would arrive at settlement and sign as owner of 345 Harford LLC.
In terms of compensation, I sold an LLC to my buyer for whatever my assignment fee would be, which I could collect in several different ways. If my buyer were paying cash, sometimes they would just cut me a check for my assignment fee. Then I would hand them the LLC documents, sign everything over to them, and our deal was done. In the event the bank seller could not produce clear title, I would need to return the assignment fee to my buyer.
Sometimes my cash buyers would not pay me the assignment fee until settlement. In this case, I directed them to use my title company and would not produce the original LLC documents until we were at settlement and I was assured that I was going to get my check.
On other occasions, my buyer needed to borrow money for the purchase. In these instances, I always directed them to use a private lender who was familiar with my routine, which went as follows. My buyer requested a loan for his purchase price, which included my assignment fee. For example, my purchase price with the bank might have been $30,000, but my buyer requested a $33,000 loan to cover the $3,000 assignment fee he agreed to pay me. From the $33,000 loan proceeds, $3,000 would remain after settlement which the title company would give to my buyer in the form of a check to the LLC. My buyer would then endorse that check over to me at the settlement table.
To recap, here are the steps in the process:
1. Make offer in the name of an LLC. I often include the property address in the name of the LLC.
2. Once the offer is accepted, create the LLC. Check with an attorney and/or your Department of State regarding the procedures and costs for forming an LLC.
3. Assign/sell your membership (ownership) in the LLC to a buyer once you receive your assignment fee. Check with an attorney regarding the documents required to assign/sell an LLC.
4. Collect your assignment fee in the form of cash or a check made out to the LLC and endorsed over to you by your buyer (the new owner of the LLC).
5. Celebrate! Congratulations on a job well done.
To some, this process might seem a little involved, but it really is very simple. Once you have done a couple, you will be amazed at how easy it really is.