Assignments Part II of II.
In this second instalment of a two-part series on flipping properties in Canada using Assignments, lets chat about some of the details. Knowing the details will give you a much better chance at a successful Assignment. If you missed Part I, you might want to read it first.
Watch your timing, especially when it’s a hot market and everyone in the real estate chain is busy. Realtors, lenders, surveyors, house inspectors, and lawyers all take longer to do their job than when the market is quiet.
Some of my clients at RMLO Law LLP are using what I call Scenario I, where they tie up a property and then assign or sell the contract for a sum of money to an unrelated buyer. Other clients are using Scenario II, that is, writing offers and then assigning those offers to Joint Venture partners.
In both cases, the Assignment process usually shortens the amount of time available to close the transaction. However more time is required because the transaction is more complicated than a basic real estate purchase. How does that work?
Let’s say you write an offer and it goes unconditional with three weeks to the closing date. The realtor’s office sends out real estate instructions to the lawyers for the buyer and seller. Your name is listed as buyer. Files are opened in your name. Meanwhile, you find a Joint Venture partner and assign the contract to him/her, or you find an unrelated buyer and assign (sell) the contract to him or her. Both Assignment scenarios usually take some time for you to finalize. Meanwhile, the realtor, lender and lawyers think you are the buyer and are doing whatever they need to do to close the deal in your name. The key issue for you to understand is that an Assignment situation chews large part of the time allowed for closing. The time varies, but once everyone understands what is going on with the Assignment, there might be only a week left to close.
In both Scenario I and II, it might be clear to you what is going on, but it isn’t usually clear to your realtor, lender, your Assignee, or the lawyers for buyers and sellers. The Assignment needs to be explained to all the players, new instructions need to be given, files need to be revised, and everyone in the chain needs to know what is going on.
What specific things can you do to make sure everything goes smoothly and takes as little time as possible? You can be as clear as possible about all the details.
- Finalize your Assignment before the deal goes unconditional.
If you are using a realtor, make sure they know. If it’s a private sale, make sure the seller knows.
- Amend the contract, in writing, to show that there is a new buyer.
You can use various forms: an Amendment, an Addendum, or a Schedule; they all will accomplish the same thing. Whichever you use, call your lawyer early on and discuss your plans in detail. What words do you use? In three recent Assignment situations, I have seen the following words used in the amendment:
- “this contract is amended to delete John Jones as buyer and replace with William Smith”
- “the buyer John Jones has been replaced by the buyer William Smith”
- “John Jones as buyer hereby gives notice that he has assigned his interest in the contract to William Smith”
Here is an example of why clarity in Assignments is so important. My legal assistant was tearing her hair out. She had two different sets of real estate instructions and a set of mortgage instructions that seemed to deal with the same property but all instructions had different names. Once we sorted it out, we discovered that:
- one of our clients had tied up a property with an offer (Assignor 1)
- the real estate office sent our law office and the seller’s law office real estate instructions for Assignor 1 as buyer
- Assignor 1 assigned to another person (Assignor 2) and did not advise us
- Assignor 2 telephoned us to discuss his purchase, did not mention the Assignment, or that he was thinking of assigning, and we started a file
- Assignor 2 assigned to the ultimate buyer
Before anyone advised us of the last Assignment, we got mortgage instructions for the ultimate buyer but had no idea who they were; we had no real estate contract for them.
On a practical basis, we as lawyers assist the Assignor (or Assignors) to move the file along, but we won’t act for everybody. There is just too much potential for conflict. In the section on timing above, I talked about how Assignments can shorten the time available to close a transaction. In a scenario with two Assignors and one Assignee, there can a tremendous amount of confusion in the real estate offices and law offices. Getting two or three sets of real estate instructions for the same property with no guide to what is happening causes delay and extra expense. As they say at the ballpark, “You can’t tell the players without a program.”
I repeat; if you are involved in an Assignment transaction, make sure the realtors, the lenders, and the lawyers are advised as quickly as possible.
What happens if the ultimate buyer (Assignee) does not close on the property? Who does the seller look to when the sale collapses?
Whether you are Scenario I (selling your interest in a contract) or Scenario II (Joint Venturing), the seller will look to the Assignor. Why? Because the seller signed the original contract with you, the Assignor (first buyer). The seller has no contract with the Assignee (the ultimate buyer). When sellers learn of an Assignment, they usually cooperate in dealing with the Assignee. In Alberta, where I practice law, sellers are legally required to cooperate. But that doesn’t mean there is a contract between the seller and the assignee. If your Assignment collapses, the seller will look to you.
Before you remove conditions on a contract that you plan to assign,
you must be ready to close on the deal yourself.
I can’t say it enough: doing diligence is ultra-important. You must investigate all the details and players so that you are confident of your buying decision. Only then have you done your due diligence. Getting to the due diligence stage is important for all buyers. In the most recent batch of Assignments coming through our law office, we have seen the following:
- Assignors who did due diligence before assigning
- Assignors who did some diligence before assigning
- Assignors who did no diligence before assigning
As Assignors, you must be careful to make sure your Assignee knows what you have done about due diligence. It’s possible not to do any diligence or even some diligence and still close the deal, but I don’t recommend it. Above all, your Assignee must understand. Assignees are often less experienced buyers and they usually, without even saying it, rely on you to tell them this is a ‘good’ property. As always, early written disclosure is best and provides you some measure of protection from an Assignee who later says you misrepresented the property.
So, there you have it, a brief look at Assignments and the Assignment strategy. In the world of investor real estate, buy and hold is the most basic strategies. All other strategies, including Assignments, will work best for you if you have some experience in the basics. Your chance of success using the Assignment strategy will increase dramatically if you study hard before you dive in, do your research, and put together a great team of real estate professionals to help you.
- Give your lawyer, lender, and realtor lots of detail as early as you can.
- As an Assignor, you continue to remain liable even after you have assigned.
- Make sure your Assignee acknowledges in writing what you have told them about the diligence you have done.
The Assignment concept is deceptively simple. There are lots of other potential issues that can’t be covered in just a blog post. Always get legal advice before you start using Assignments, including the form of Assignment you will use.
Need an Alberta real estate lawyer? Get in touch with Barry at RMLO Law LLP today!