The Key Phrase in Wholesale Contracts That Could Cost You

Did you know your assignment agreement can lose you thousands of dollars?

I want to give you the right information, and not the typical fluff of “just assign your contract.”

The Assignment Agreement

Like many others, you probably got your assignment agreement and purchase contract from the internet. That’s fine; things are tight when you’re just starting out and you have to get it how you can. I did the same thing. However, you have to be careful, because there’s verbiage in your assignment that can cost you.

The assignment agreement assigns all terms and conditions of the contract to your end buyer. I’m sure if you’re on BP you have the education to know this by now.

This agreement allows your buyer to replace you as the buyer of the property.

However, your verbiage in your purchase contract can create an out clause for your end buyer.

The Purchase Contract

A wholesaler should have the following in their purchase contract:

Seller name
Buyer name
Property address
Purchase amount
Signatures
Some legal consideration (earnest amount)
Dates of signatures
Close of escrow date
Statement that buyer will pay all customer closing costs
Buy as-is
Inspection period

The key here is the last item, the inspection period.

We know as wholesalers that this is the escape clause to cancel the contract if you can’t find a buyer. As long as you find a buyer within the timeframe, you’re good.

Where the problem exists is in the purchase contract. The assignment agreement allows your buyer to stand in your place to close the contract. This is standard practice unless you’re double closing.

You and your buyer agree to put down the required earnest money to lock the deal in, and you’re under the impression everything is great. Right about now you’re counting your money and planning what you’re going to do with your recently found fortune, but there’s one thing.

You assigned all the terms and conditions in the purchase contract to your buyer.

What’s the Issue?

You’ve assigned the contract to your buyer, but what if there are still inspection period days left on the purchase contract?

What you just did was award your end buyer access to the inspection period, and an out clause. Even if your buyer put earnest money down, they can have it refunded.

So here’s what you need to do. Make sure in your assignment agreement you clearly state: “The inspection period referenced in the original purchase contract does not convey to the assignor of this agreement. The inspection period is null and void upon execution of this assignment agreement, and all earnest money is nonrefundable.”

This simple oversight can cost you thousands of dollars. If you’re working with a very experienced buyer they will look for this and if it’s not there they can tie up your deal and use this clause to get out the deal.

What wording do you include in your contracts to keep yourself protected?

Let us know in the comments below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.