Getting Around The “Non-Assignability Clause!”
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:
“This Contract may not be assigned without the written consent of Buyer and Seller. If Buyer and Seller agree in writing to an assignment of this Contract, the original parties to this Contract remain obligated hereunder until settlement.”
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 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.
Blessings,
Steve
Here is my question. Doesn't creating an LLC to put a property into take so much time that it will ruin the deal?
When I created my business LLC (Attainhome, LLC) it took me a more than a month to recieve back from the Secretary of States office the verification that my LLC was official and registered.
Or can you register the LLC but still put the house into it before it is fully registered and official? Can you assign the LLC before it is fully registered?
Where I live, I can create the LLC in a day. If I wait for it to come in the mail, it can take a month, but I don't go that process. I do it myself, and I don't wait for an attorney.
Blessings,
Steve
Steve,
How do you create LLC in one day ? What is your process ?
thanks
Tori
In MN you do not need to get the docs back from the state before your LLC is official. In other words, as soon as you file the docs, your LLC is up and running...
Andy, unless you're in one of the big states, geographically (AK, TX, CA, MT,etc) you should be able to get to easily drive to any one of several states capitals & its Sec. of State office, carry in your new LLC app & check, and walk out a few minutes later with your newly chartered LLC or Corp in your hands.
I've driven to my state capital, Olympia and done this a number of times and nothing could be simpler.
Wait serveral weeks? Not in my book.
Good luck
John Merchant
I checked with my lawyer. I could overnight it to Columbus Ohio (It's a good 2h drive for me) and pay a total $225 for an expedited service and I willl get one in 24h or less...
a land trust can be done for free instantly and it doesn't require registration with the state so it can be done quicker and with more anonyminity.
banks might be suspicious though of selling to a trust.
Looks like a few people keyed in on something. I like your work-around by using an LLC, but using a Land Trust is a viable option.
For one, the banks/mortgage companies that I have dealt with don't like having an LLC/Corp take title to the property. But Land Trusts are common and used for estate planning. So take the property into your Land Trust. Assuming you record the deed, you Do Not record it showing who the beneficiaries are. That is indicated in your Trust Agreement. And of course, you are not recording that.
Just my thoughts.
Ho...
Three questions
1) You create a legal entity (trust) intend to hold a property, and you don't think it needs to be recorded in your local court? How will you prove you are the legal trustee and can do anything on that land? Or is the local court in your area does not ask for money to record?
2) when you change benefical and trustee, you create a gift tax event. IRS does not allow you to exchange trust for consideration. How do you avoid that?
3) I believe the purpose is to flip a contract from bank's REO to investor. Not to flip a property and try to avoid the Due ON Sale of a mortgage. And it is trying to avoid no-assignment cause on that contract that bank is willing to overlook it. When you flip, it is a business. And after you flip a few propertiers, bank will know you purchase a contract to flip. Now, how will you sell to the REO department that you plan to hold it in a family trust and intend to flip it? Will it help you in the long run or hurt you?
Thanks
Jya-Ning
Question: Why does deeding the property into the LLC not trigger the due on sale clause?
Rgds, TJ
Deeding a property into an LLC does trigger the due on sale clause. This article has nothng to do with the "Due on Sale" clause, but instead a "non-assignability" clause.
Blessings,
Steve
We can walk the articles of organization into our State Department of Assessment and Taxation and pay for expedited service. We can walk out with it in 15 minutes.
Blessings
Steve
to Steve and all other on lookers:
I was just wondering, what if I took you idea step further. What if I:
1. set up a property in a land trust with my LLC as the trustee and present owner as the beneficiary.
2. Have my land trust agreement set up that gives theTrusteee(my LLC) has power of direction to sale property anytime.
3. a power of attorney from owner/beneficiary giving me power to sell property.
4. I sell my LLC to an investor, who would than become the new trustee of the land trust, and would also inherite the power of attorney to sale the property anytime they please.
That way I would also avoid the 4% transfer tax in Philadelphia which is the highest in the nation.
Why can't you purchase it in a trust and just assign the trust at closing and switch trusties after closing?
Wouldn't that be easier?
Or do banks not do that?
I was waiting more experience one to reply. But I guess they are having busy time in National REI meeting this week.
Just for my understanding of Trust. Since you are going to change the beneficial in the later time, the trust will be revocable. Therefore it will not protect your personal asses in case something went wrong as LLC will do.
2nd, if you do apply llc yourself, it is much cheaper than trust.
a land trust can be done for free instantly and it doesn't require registration with the state so it can be done quicker and with more anonyminity.
banks might be suspicious though of selling to a trust.
While your idea is doable, it really isn't feasible.
The idea of using an LLC is when the seller won' t let you assign the deal. If they won't let you assign the deal, they certainly won't agree to anything else you have proposed.
Also, you may as well just let your LLC stay in place and just assign a new trustee, your buyer.
Is Philadelphia really 4% for transfer taxes now? MD was the highest at 2.5%, 4% would be ridiculous, ours is already too high.
Blessings,
Steve
please see my questions to 4ndy
Thanks
good questions...
1) The actual articles of the trust that specify the beneficial interest of my land trust are not on public record. That is one reason people use the land trust... for anonymity. The deed pointing to the trustee of the land trust is recorded. Writing up a articles of trust (or what ever you call it) can be done using form letters essentially for free. On the other hand an LLC needs to be registered with the state... Do it with a rush it cost me $225 in ohio not including overnight fees because I don't live by the capital and not including if I pay for a lawyer to do it for me.
2) You may have a good point with the gift tax thing. I don't understand it to well... Some how it seems that things should come out in the wash and you only get taxed for the profit you make on the deal...
3) I am not putting the property into my family trust and nor am I telling the bank I am doing that. They know I am a pro. They want to know that I am going to close on it. Because many investors sign to purchase houses and have no way of closing other than assignment they have made rules that say no assignments.... It has become a bad word to them. An emotional hotspot... As long as I "don't say the bad word" and they the don't care what the heck I am doing as long as they get there money when I say I'll give to them. If I do ten deals with them that means that I have built a highlevel of rapport with them and they know I will close and they will want to sell it to me and will probably be even more open to whatever creative stuff I want to pull... One things for sure the listing realtor will love me!