Assignments Part I of II.
Contracts of Assignment, usually just called an ‘Assignment,’ are useful ways of making money with real estate. I’ve talked about them before (e.g., this blog and this video), but they’re worth revisiting in more detail because of their significance to the Canadian market. Sometimes known as ‘flipping’ a property, this is Part I of a two-part series on how Assignments work, with a focus on Alberta real estate.
Assignments are a sophisticated investor strategy.
Don’t dive into these without some initial real estate experience.
Get a real estate lawyer familiar with Assignments and who can protect your interests!
You write a real estate purchase contract offering to buy a piece of property, and the seller accepts your offer. This gives you control of that piece of property. You can then make some money by selling your interest in the property by way of an Assignment before or after you go unconditional on the purchase contract. The Assignment contract itself is usually just a page or two—but it’s important. It sets out the parties, timing, Assignment monies, and other details in writing.
Take Note: Assignments relating to real estate law in Canada are provincially regulated. Provinces have dramatically different rules. For instance, in BC the practice of what has been described as ‘shadow-flipping’ recently caused the BC government to take action. Shadow flippers would get control of a property by way of a purchase contract and then assign or ‘flip’ the purchase contract sometimes two or three times before an ultimate buyer purchased the property. Some sellers, especially long-time owners who might’ve purchased for $25,000 35 years ago, were overjoyed to receive an offer to purchase for $900,000—only to find out the property was flipped a couple of times with the final price to an ultimate buyer being $1.2 million. Assignments are now heavily regulated in BC. On the other hand, in Alberta, pursuant to s.154 of the Alberta Land Titles Act, any offer to purchase is assignable even if the contract says it isn’t! Make sure you get advice for your province. If you’re looking to assign properties in Alberta, get in touch with me at RMLO Law LLP, where we deal with this kind of deal regularly.
Assignments are useful at any time in the real estate cycle. They are especially useful in a rising market or if your network or marketing funnel brings you more deals than you can handle. For example, regarding rising markets, during the Alberta boom of 2005–2007, Assignments were very popular. Prices had risen dramatically, the number of listings had dropped, and competition for homes became fierce. I saw a news clip where a veteran Calgary realtor was noting that there were 5,000 licensed realtors, and only 1,500 properties listed for sale. A newspaper story said that buyers were lining up to make offers on condemned houses that had been used for marijuana grow-ops. The idea was to get control of a property in a hot market, and then use a long closing time to let the market rise a bit. Once the value went up, you would sell your interest by way of Assignment before closing on the property. You (the ‘assignor’) gets your deposit back and whatever your ‘assignee’ (new buyer) will pay you for taking over your position in the original contract.
Let’s talk some details. Before diving in, I want to make a distinction between what you can do legally under s.154 of the Alberta Land Titles Act versus practical success using the Assignment strategy. Even though s.154 allows an Assignment, having a legal right is not the same as maximizing your chances to get cooperation from other parties. Sometimes if other parties don’t like what you’re doing, they dig in their heels and say, “sue me.” It’s obviously best to try to avoid that.
Points to Remember When Flipping Properties with an Assignment:
- The option to assign should go in the purchase contract terms.
Contracts where you might want to assign used to be written showing the buyer as ‘Your Name or Assignee,’ or perhaps ‘Your Name or Nominee.’ With the rise in mortgage fraud, lenders and title insurance companies don’t particularly like assigned contracts, (even though they are perfectly legal). You are better off showing just your name as the buyer. Then, in the terms section of your contract, (currently section 9.2 in the AREA contract), you add some extra words. Those words are, “buyer reserves the right to amend buyer’s name.” Why does that make a difference? Firstly, with this term in the contract, if you want to assign the contract, or joint venture the contract, you have the right to do it. You don’t have to go asking the seller pretty please. Secondly, it appears that where lenders don’t like Assignments, they are very familiar with amendments being made to contracts and, if the buyer’s name changes by way of amendment, they are okay with that.
- Leave yourself flexibility in the contract.
When you write a purchase contract with the option to assign as a clause, you have flexibility. You may choose to close for yourself. Or, any contract with the Assignment clause also indicates and gives you the right to change the buyer’s name.
- Financing for the purchaser may be affected by the Assignment.
Lenders finance on the lower of the price in the purchase contract or the appraised value. If you have a purchase contract with a seller for $300,000 and you assign the contract to the ultimate purchaser for $10,000, then the ultimate purchaser is paying $310,000. Based on the rule above, the lender will only finance on the basis of $300,000.
- Lenders like the seller to be the name of the owner on title.
How can you organize it so your ultimate buyer will get financing based on all the dollars he has paid and have a contract the lender will live with? Remember, full disclosure at all times to your lender/broker. You may have to go back to your seller and explain the situation to them. What you need is a new purchase contract written between the current owner and the ultimate buyer for the ultimate buyer’s price. It’s useful to use a schedule in your original contract that briefly—and in plain English—says to the seller that you might buy the property and move in yourself, you might rent it out, or you might assign the property to somebody else. The schedule says that whatever you do, the seller will provide access for your tradespeople, provide documentation that will move the property to your ultimate buyer, and will generally co-operate with you. Replacing one contract with another can be a little tricky, so get help from your lawyer on the type of schedule to use as well as how to replace one contract with another.
Why Use an Assignment?
There are two basic scenarios.
You just want to tie up a property because you believe the property is worth more than you agreed to pay. If you could find a buyer that wants the property and agrees it is worth more money, then you can assign them the contract.
How much you can assign for, or, in other words, sell the contract for, is a function of hidden value in the property, market psychology, and simply how much your ultimate buyer is willing to pay. Once you have established that number, your ideal scenario is that you prepare your Assignment, both of you sign it, you staple it to your already negotiated real estate purchase contract, and your buyer gives you the Assignment price along with any deposit you have already paid. Your part of the original real estate purchase contract is now finished. You walk away and your Assignee closes the deal.
The buyer is looking to do a Joint Venture (JV). These are the ‘Finders’ of a property; they have real estate expertise but may have run out of money. They have a relationship with the ‘Investor,’ who is the money partner, and both have agreed to a Joint Venture to buy property. The Finder goes out and ties up a property with an offer to purchase. Then, if the Finder and Investor agree that it is an appropriate property, the Finder assigns all or part of his/her interest to the Investor. The Investor then applies for financing, either on his/her own or in conjunction with the Finder.
When Do You Get Your Money for Flipping a Property with an Assignment?
To repeat, an Assignment is a sale of your interest in a real estate contract. It is not, in and of itself, a real estate transaction. That means you can get your money when the Assignment is complete—you don’t need to wait till the deal closes.
To use an example, if you were selling a car, would you give the car to the buyer and let him/her drive away before you got your money?
In a recent transaction, a buyer (Assignor) assigned his interest in a property for $8,000. In other words, this is Scenario I where the Assignor is selling his interest in the real estate purchase contract. My Edmonton real estate legal firm, RMLO Law LLP, acted for the ultimate buyer. After closing, the Assignor called me and asked when I was going to send him his Assignment monies of $8,000. I had to tell him that I didn’t have his $8,000, and it wasn’t my job to collect it for him. He should have collected his funds when the Assignment was complete.
If you are a Scenario I Assignor, your job is tying up the property, finding your Assignee, negotiating the Assignment, and collecting your Assignment funds. Then your part of the Assignment is finished.
Next time, more details on how Assignments work in Part II of this two-part series.
If you need a real estate lawyer who knows the ins and outs of Assignments in Alberta, get in touch with Barry now.