Profile picture for Connie Klemme

Buyer assigns contract to another buyer, higher price......

So, it appears that this is legal in Oklahoma (it is...much discussion has come of it lately and there is a company on TV that openly does this), but I wondered if it was legal in other places.   The situation is when a buyer (investor) makes an offer on a property and reserves the right to assign it to another party.  That buyer then finds another buyer for the property at a higher price, but they don't buy it and flip it, the assign the contract to the new party and at closing the collect their profit, and the seller collects the amount it sold for to buyer 1.

Example, Buyer 1 and Seller enter a contract for $10,000 for property A,  Buyer 1 finds buyer 2 and agrees to sell it to them for $15000, The contract is "assigned" and agreement between buyer 1 and 2 is written,   closing occurs, buyer 2 payd $15000, buyer 1 gets $5000, seller gets 10,000.

My first reaction is to stay...this wouldn't happen, seller wouldn't have taken a low offer or somebody else wouldn't pay $5k more but it happens often.

So....
What are your thoughts on this?  Expand and discuss.  Agents, non agents etc.  Is this just good business skills in the art of leveraging opportunities or is this bordering on practicing Real Estate without a license? Comments....discuss.
  • September 14 2013 - Mustang
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Answers (24)

Profile picture for Connie Klemme
I'd like to hear from all sides, I put this in pro to pro section because it's not really about home selling or home buying, it's more about a practice in the industry so ...it seems to fit here better.  but this is not just for pros.

I'd like to see different points of view without personal attacks and defensive remarks.  It's important if you disagree with something to see the merits of the other side so that you can fully stand on on your argument for the meat of the argument rather than an emotional reaction to the opposing point of view.  I hope that this is the case with the responses, I'm genuinely intersted in seeing all perspectives on this.
  • September 14 2013
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Here in the Great Pacific Northwest, the NWMLS has a standard clause that requires the approval of the seller in order to assign the contract.

Back in the early '90s, we had such a quick run-up that speculators were buying properties and re-listing them as soon as they got the contract signed. After not a few complaints from sellers ("They just bought it for $89,000 - how can they sell it for $110,000 and I can't!"), the MLS changed the contract.

There are honest and ethical reasons for "and/or assigns," when the intention is to move the property into a trust, for example. But the scenario you describe is basically stealing equity from an uneducated seller, and while the law doesn't protect them, real estate licensees, in my opinion, are obligated to do so - even if they represent the buyer.

Is this tricky? Yep. Still, I don't want to be the licensee that steals a property for a client. 
  • September 14 2013
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Profile picture for Connie Klemme
thank you Mack.  I appreciate your response.  That is a well put and clear perspective.  I spent the last half of yesterday trying to think of other reasons to assign property and finally started seeing legitimate circumstances but this particular circumstance has been bothersome to me.  I was hoping to hear the side of a supporter on this just to see a whole picture.  However...you've stated it pretty well and I don't see that it is anything other than stealing.

Thanks for the reply.  
  • September 15 2013
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Profile picture for SoCal Engr
I don't have the ethical concerns about "stealing from the seller" that you and Mack seem to share.

#1 - In a free and open market, the seller can choose to sell at any price, subject to buyer's willing to buy and lender's willing to lend. It is the seller's responsibility to "know" their market. How the seller fulfills this responsibility is up to them.
#2 - The buyer (assuming they actually intend to buy) is assuming a risk. What if they cannot find a buyer fast enough? What if the property is actually priced right (yeah, probably isn't if this works) and the buyer has to hold the property for a period of time?

What I don't like, are...
#1 - If the seller is completely dependent on the REA to set a price (i.e., acting as a sheople), it opens the potential for REA collusion. In this case, it would be stealing (in my opinion).
#2 - Biggest issue I have with this is the potential for this to morph into a derivative market, selling options on houses. The biggest deterrent to this is that, in its current form, there is a time-fuse lit-and-burning on the whole transaction, and the buyer is obligated to follow through and buy. But...

In our neighborhood, we had to put down cash to hold the house during construction. The cash amounted to about 2% of the house's price. A person put down the 2%, waited for the house to be close, and then immediately sold the house, realizing a 625% return on their 2% down. Even figuring in capital gain, that's one heck-uv-a return on their 2%.

But, first they had to close. That means they had to commit to purchasing. That means they had to tie up additional monies, with the potential of needing to hold the property.

What has been left unaddressed is "what happens if the 'buyer', unable to find another to sell to, simply invokes an item on inspection to back out of the deal?" I know it's a narrow argument, but this is the scenario I fear. Sellers thinking they may have actually sold their house, but an unscrupulous "buyer" simply tying up the property hoping to assign the property to a secondary buyer.

BTW...

The real "issues" in this scenario, as is (imho), are...
#1 - If the seller engaged the services of a REA, was the seller properly informed of the estimated current market value of the property?
#2 - If the buyer is also represented by a REA, was the buyer properly informed of the estimated current market value of the property (especially if they are a cash buyer)?

If the answers to both are "yes" and "yes", and the original buyer is sincere in following through, with or without a secondary buyer, then....game on.
  • September 15 2013
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Profile picture for CallTheSisters
Going back in time this was a common practice in Florida in the late 70's when properties were increasing in value rapidly.  At the bottom of the Florida sales contract was a statement:  This contract is assignable.

The second buyer accepts all the terms and conditions of the original contract but agrees to pay the procuring buyer an amount over what was agreed to by the seller.

The practice as I recall was primarily used in commercial real estate.  A seller has a Mom and Pop convenience store.  They want $300K for the property which they are selling as an operating business.  You have a connection with CVS who wants to open a drug store in that area.  You put an assignable contract on the property for $300K and then negotiate with CVS to pay $500K.  Seller gets their $300 K, You get $200K, CVS gets their drug store.

Commercial real estate is very different from residential real estate.  However, if the contract states it is assignable, and the seller has been informed prior to signing what that means, it should be legal in residential real estate.

It's just another version of a flip.
  • September 15 2013
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Profile picture for Blue Nile
To me, it is an "unethical practice", but not due to "stolen equity", but rather "insider trading" and "extortion".

Obviously, it wouldn't happen at all if the sellers just reject that clause in any offer.  But it appears that many are anxious to sell and don't want to delay the sale by waiting for other offers.  But short time "flipping" would normally not happen if people had to pay the transaction fees and typical Realtor commissions.

By "short circuiting" the "flipping" process and skipping the fees, "investors" can tie up all inventory in the low price range, and then extort higher prices from the buyers, simply because some need to buy regardless and there will be nothing on the market if 2 minutes after each listing comes on the market a slightly low-ball offer is made and the listing agent talks the buyer into accepting it, tying up the listing.

Personally, I think the listing agents do a disservice to the seller in allowing such offers to go through without removing the assignable clause, and that this happens more due to not being informed than the seller's desires to rip off the buyer at no benefit to the seller..., but maybe the seller's just don't care and just want to dump the property as quick as they can.
  • September 15 2013
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Another issue is that the listing agent is not getting the best price for their client. That's a violation at a few levels.
However, there are reasons when a seller is okay with it; family emergency, divorce or just want's out at any price.
  • September 15 2013
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So_Cal, I'm relieved to finally see a real estate agent accused of being ethical, and here's another add-on to the discussion.

1. To be a dirty and-or-assigns, the property would not have been listed and exposed to the market. If it had, then that middle buyer wouldn't be in a position to re-sell, because the end buyer would be able to buy it direct.

Except with commercial real estate. There's a truism in commercial that "everything's for sale," which is the defining factor. With that in mind, the commercial MLSes are incomplete, and even listing in one doesn't guarantee much exposure. The CVS contact probably couldn't consider all of the possibilities in the MLS, and so here, it's not so much a matter as to whether the seller could get a better deal, because they probably couldn't have ever found a buyer for $500K.

2. If the transaction involved a real estate licensee, a licencee's first duty is to the general public. To enter into an "and/or assigns" deal with an unrepresented seller is, to my mind, an open invitation to meet with their family's attorneys at some future date. At the very least, an addendum should be added that the buyer intends to sell their position before closing. If it was a real estate licensee acting as a principal, that addendum should state, sell their position at a profit before closing.

3. In the instance with new construction - speculation takes place all the time in rising markets, and will take place with the next round of condo building - the developer / builder should be considered savvy enough to be aware that the market may change. If prices go down, they will be stuck with your deposit; if prices go up, you might well sell at a profit. Florida had a scene where there would be several layers of buyers from assigning their position during the run-up, by the way.

4. Flipping, it should be restated, is actually closing on the deal and then turning around and taking the risk of re-selling. "And/or assigns" gives the middle(wo)man the opportunity to simply leave their deposit behind if they can't sell their position.

5. We must stand against the idea that it's not victimization because the other person should have known better.

Just because some fool wasted $1500 at a get-rich-quick-in-real-estate seminar doesn't mean the rest of us should stand by when they go and rip off some other ignorant soul.
  • September 15 2013
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Profile picture for The LaPeer Team
Here we have "wholesalers" who do this. The properties are often distressed and the seller is selling it as an "as-is" property because they have to get out of it quickly. Sometimes these properties are listed with an agent, and sometimes the wholesaler combs neighborhoods, county records, etc. looking for these opportunities. While I believe that some agents sell their clients short with this practice, I also feel that there are times when it saves a owner's rear end. If the owner is losing their home and someone reaches out to them to buy it, who cares if the buyer turns around and makes money on it as long as there is full disclosure. As with any business practices, there are good and bad participants. I can only speak for myself and would only do this with full disclosure to my seller. In the end, it is their decision. The key is full disclosure. 

Side note - most banks/foreclosures do not allow this practice and neither do many title companies here.
  • September 15 2013
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Profile picture for SteadyState
In the financial markets this process is called arbitrage - in fact the large brokerages a few years ago were given bids and asks 30 ms before others in the market  so brokerages bought from X selling at 99 and sold to Y who bid 100 pocketing the $1. Once this was discovered a law was put in place that did not provide the speed advantage.

Thus this process is acceptable if done without such undisclosed advantage. For example, two agents from the same brokerage - one agent buying from another agent and then immediately flipping the property to another buyer.
However, a general question does come to my mind - the listing agent is represented as a fiduciary whose goal is to get the seller the best price. Looks like someone did not do they job if this occurs?
  • September 15 2013
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Profile picture for Connie Klemme
the ones I have seen there is a clause added that the buyer reserves the right to back out within 45 days (contract is for 45 days) if their business "partner" does not accept the property on final walk through.   it doesn't disclose who the business partner is - looks to be the potential buyer 2 (I realize this was new information to the scenario)-   so basically, buyer can back out at last minute because undisclosed 3rd party doesn't like the house.   I don't know if this is what's common when these deals are done but I can't imagine a seller willing to sign that if they understand it.
  • September 15 2013
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In the olden days, this is how real estate agents used to work: They would go around asking property owners how much they'd want for their property, and when they found someone who was undervaluing it, they'd sign a "net" listing, which meant that the seller would get the list price and the agent would get to keep anything over that.

Well, a lot of states have outlawed the "net" listing, especially since they've required brokers to be licensed.

  • September 15 2013
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Profile picture for Connie Klemme
So - what if there are two agents....a buyer's and a seller's.  No one commented on the buyer's agent.  are they without obligation other than to present the offer of the buyer wishing to assign???  

comments...
  • September 15 2013
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I don't see how this would happen with a listed property. If the property is exposed to the marketplace, the second buyer could buy it as readily as the first buyer. Why buy a listed residential property, essentially on option, and then shop it around? Basically, a FSBO without showings.

As I said, there are legitimate and honest reasons to do "and/or assigns," for example, a builder might be waiting to set up an LLC or a buyer may be waiting to establish a trust.

It's not the tool that's bad, it's how it's used!
  • September 15 2013
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Profile picture for SoCal Engr

"So_Cal, I'm relieved to finally see a real estate agent accused of being ethical...."

Doh! I must be slippin'.

"And/or assigns" gives the middle(wo)man the opportunity to simply leave their deposit behind if they can't sell their position.

If the deposit is truly "left behind", and the seller is willing to take the risk of tying up the property, then ??? Of course, if I was the seller, I'd want the deposit to be worth the time and potential hassle. And, I'd include a kick-out clause, and I'd include right to continue marketing, and...and...and. Not sure the buyer would sign off on all this.

"We must stand against the idea that it's not victimization because the other person should have known better."

I never meant to infer that it's not victimization, for whatever reason. Or, that it should be tolerated as a "known risk". My sympathy meter simply pegs a bit quicker when the "victim" is complicit in their own victimization, either through greed or self-imposed ignorance (most information is too easily found/obtained today to effectively use the "but I didn't know" defense/excuse).

"Just because some fool wasted $1500 at a get-rich-quick-in-real-estate seminar doesn't mean the rest of us should stand by when they go and rip off some other ignorant soul."

Agreed. However, this seems to be a role more appropriate for those in the RE biz. As a consumer, my role is to try and avoid being "some other ignorant soul."

"the ones I have seen there is a clause added that the buyer reserves the right to back out within 45 days (contract is for 45 days) if their business "partner" does not accept the property on final walk through."

No way. Uh-uh. 45 days and you can walk on a "naw...it didn't work out"? Any seller who signs off on this is uber-desperate, uber-naive, or thinks their going to pull a "fast one" on the buyer. And, any REA who doesn't strongly advise against their client accepting an offer like this should have their name published in a hall-of-shame.

"So - what if there are two agents....a buyer's and a seller's.  No one commented on the buyer's agent.  are they without obligation other than to present the offer of the buyer wishing to assign???"

If a "buyer's agent" truly represents their buyer, I don't see where it is their role to work against their client's interests (unless a law is being broken). If the REA's personal ethics are offended, they can always step away from the client and/or transaction. Then again, I would hope the REA would be smart enough to know this was their client's plan going in.

"I don't see how this would happen with a listed property. If the property is exposed to the marketplace, the second buyer could buy it as readily as the first buyer."

Yep. Why would buyer #2 pay a markup to buyer #1 if they could make their own offer direct to the seller?

"It's not the tool that's bad, it's how it's used!"

True, and not just with this mechanism. Pretty much anything can be abused and/or used for illicit/unethical purposes. That's a problem when dealing with "people", though, hopefully, not a common one.

  • September 15 2013
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Thanks, SoCal.

I understand feasibility studies, and I've seen A/OAs with them, but they're straightforward - a developer wants to know what they can do with the property and so they want to tie it up, and they want to be able to assign the contract to an LLC. I think that's fine.

I have more sympathy for the ignorant. Wherever you draw the line, some people are going to be higher-functioning than others.
  • September 15 2013
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Profile picture for hpvanc
A little late, but I just saw this.  I don't see it as stealing sellers equity, I can see where the practice can have applicability under some limited circumstances, but probably isn't desirable under most circumstances.

The buyer buying and hoping to assign is counting on enough market appreciation to cover the cost and a profit to assign to an investor within 45 days?  If not the buyer has a contingency to back out of the contract, so the seller should be fully aware.  It is essentially the same as a trader playing the spread.  I do wonder, which settlement price gets recorded?

If the final price is what gets recorded, it seems to me there is risk of using straw buyers and market manipulation. All sellers, not just ones that sell to these buyers hoping to assign would benefit from false equity in the middle of what is essentially a pyramid scheme. As a profit making endeavor, it can only work in a bubble or in an inflationary economy.

  • September 20 2013
  • 0Yes

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As an attorney and investor with 23 years experience, I can tell you that it is perfectly legal in all 50 states in 2013 to assign a purchase contract and make a profit, so long as the contract does not require the seller's permission or outright prohibit assignments.

Typically, with a bank-owned property the lender will specifically prohibit this, as will the lender who is accepting a short sale.

But, if you are dealing with a FSBO and your contract does not say one way or the other, the contract IS assignable.  Dopey seminar leaders who say "write buyer and/or assigns" are wrong.  That does NOT make it assignable.  If it doesn't prohibit assignment, a real estate contract is always assignable.  The only exception would be if the seller is doing owner carry and is relying on the buyer's credit.
  • September 21 2013
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It is legal just about everywhere, it is called wholesaling, in the states that does not allow a contract to be assigned usually allows them to do two closings one after the other, so the buyer would close on the house and sell 10 minutes later to a new buyer at a higher price, some places have to wait until the deed has been registered at the county assesors so they may have to wait 24 to 48 hours. Feel free to call if you have questions.
  • April 22 2014
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Profile picture for gunsite
There are some great answers here but most are still missing the point.

Let's say there's a fix-n-flipper named Tim.  Tim spends 8 hours per day everyday managing the construction on several of his fixnflips at once.  He has lots and lots of his cash tied up in purchases and construction costs.  

Now how does Tim go about finding new investment properties to fix up while he's so busy?!

1.)  He could pay a staff.  That staff would have to be expensive because they are smart about investing, real estate, finances, construction, markets, etc.  Let's say he has a staff on the payroll that cost him $8,000/month.  This staff is lucky to find 2 or 3 deals for Tim per month.   And sometimes Tim has so much construction going on that he can't afford to purchase all of the deals the staff finds him.  Therefore some months he's wasting $8,000 because sometimes he has a staff he doesnt need that month.

-OR- 

2.) Tim can simply call up other investors (who he knows are smart about all areas of investing including markets, construction, etc) and say to them "Hey, if you come by any properties that you aren't going to rehab yourself send them my way and I'll pay you an assignment fee."  This assignment fee pays the other investor for their knowledge of the market.  After all, that investor often has a lot of time and effort put into finding these distressed homes to begin with.  This way Tim can buy as many or as few as he wants without having to pay a staff.   It's an EXTRA fee.  On top of what the home would normally sell for.  The fee is for the investor's education and experience.

The owner sold the house for fair value at their own choice.  The assignment fee is the reward to the wholesaler for his knowledge, services and effort.  I mean, if you wanted to sell your car you can put it in the front lawn with a sign.  OR you can take it to a Dealer who has the proper connections and marketing and sell it quickly.  What's the tradeoff?  You have to pay that dealer a fee.  It's the same thing.  The car is worth the same either way.

Investors are the people taking the risks to get distressed houses move-in ready again so a consumer can get a traditional loan and move into the house.  Without the investor network the market would be vastly different.  Investors get compensated for their risks.  Without the investor the bank wouldn't give the average person a loan on a crappy house.  It's a win-win-win for all involved.
  • November 13 2014
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How many of these have you done, gunsite, assigning contracts in the 30-45 day window before the original buyer closes on the deal?

  • November 13 2014
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Profile picture for donnamay265
How do we handle full disclosure?  How many homeowners went under when their mortgage payments went up.  They complained to the banks and they show them the disclosures they signed, so are the banks unethical?  What about the closing costs and fees, yes there is a disclosure the sellers sign but for some reason they never really understood that.  How many realtors would tell their sellers the dollar amount they are getting paid.  Again, I don't know how many times I hear sellers tell me they thought they would walk away with more than that?  How about this one, do the realtors tell the sellers when they sign a contract with the realtors ..... how long the contract is for and that it is negotiable or that if the seller finds a buyer from his own source not due to realtors marketing that the seller still has to pay the realtor his or her commission?  Is that ethical?  Its the same as for a buying agent, I used and signed with a buying agent, found a house bought it and bought another house shortly after on my own and she tried to collect a commission from me?  Wow!  Was she ethical?
igning.  We inform the sellers when we buy that we do this for a living.  We go over the pros and cons of listing with realtors or selling to us.  Sometimes they go with realtors and sometimes they come back to us as we leave our offer open and not pressure them to sell to us,  Either way, they feel more confident in their decision.  I learned quite a bit from this website[promotion deleted by Zillow mdoerator. Please see our Good Neighbor Policy for posting guidelines]
  • November 13 2014
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Profile picture for rgarret1
I've done 48 wholesale flips and 80% of them my interest is sold within 24hrs.  Its very legal.  I find the houses that investors don't know about and that Agents don't want to list because 6% isn't a lot of commission on say 5,10, 15 thousand dollars.  Most of these homes were at one time listed with agents but didn't sell because they were overpriced in the market.  We can talk equity all day but buyers determine what homes are selling for. We as wholesalers perform an important service for our communities.  Those empty homes that never seem to sell, we talk sense into sellers, sometimes spending hours, days, weeks, and even months cultivating relationships with these people, then finally getting them to accept a price that's fair in the current market. Us wholesalers put more tax dollars into the system and better neighborhoods.  We don't scam anyone!
  • December 02 2014
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Hi Connie,

I am in the business of Wholesaling Real Estate.  I sell to cash investors, that I already have lined up, through the process of Assignment of Contract or Double Close.  I'm upfront with everyone involved that I'm in this to make a profit.  If someone's uncomfortable, I move on.  It has to be a win for everyone involved or I don't do the deal. If you have any questions or just want to discuss the topic further, feel free to contact me direct.

Regards,

Mike McBride
Cascade Plumbing & Development, LLC
 [contact info deleted by Zillow moderator. Please see our Good Neighbor Policy for posting guidelines]
  • December 08 2014
  • 1Yes

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