Ep. 30 | How To Wholesale or Assign a Deal And Actually Get Paid
On this episode of The Mobile Home Park Lawyer, Ferd walks us through how to wholesale or assign a property deal, and make sure that you get paid in the end. Enjoy!
0:00 – Intro
1:52 – The first thing that needs to be done is getting the contract signed, and the contract must give the right to assign the property, but there can be a lot of issues with this
5:18 – Next is to put it into an assignment contract
5:50 – The assignor should make sure that everything is what it seems
7:13 – You need to reference the assignment fee and also how and when you will get paid
10:22 – You need a non-circumvention provision and you must make sure that the inspection period is referenced
Welcome back mobile home park nation. Here again today, going through some more legal documents, just trying to keep this thing jazzed up for all you guys. This one, I think everybody’s going to love because it’s something I see a ton of people trying to do. It’s assigning a contract for wholesaling or flipping the paper or something, whatever you want to call it.
Basically, this is when you’re going to get a property tied up, meaning under contract, but you do not intend to close it, or you just don’t, you’re not planning on closing it yourself, but it’s a good enough value kind of deal that you can add value to somebody else by passing it onto them. And in return you get paid some sort of fee or commission or piece of equity, how you get paid there’s some that could have some hair on it too, depending on licensure, if you’re a broker, if you’re a lawyer, if you’re not, neither of the above, if you’re a syndicator, so there’s other, you know, state and federal regulatory things that could come into play here. So, I’m not in this episode advocating you can do this legally, but it happens all the time and I’ll cover some ones that are do’s and don’ts from pros and cons in subsequent episodes.
But really today, the goal is getting you paid on signing the purchase contract. So right out of the gate, obviously you have to get the contract signed. We’ve covered the details, the ins and outs and contracts in another episode, but the better the contract form, the better you’re going to be able to assign it down the river to the next guy.
Key, absolutely number one thing for this process is that contract have to give you the right to assign the property, legally. Ideally, I’ll have an assignment that says, it won’t say my name in there. It says, it’ll say ThirdFour Properties, LLC, and or assigns. That’s my paper tagger buying entity, my kind of headquarters entity, which owns no property by the way. So, they never get, nowhere in the chain of title is some other property-owning LLC or my name personally, but that is the ideal verbiage. Just blanket ability to assign. If a seller does not want, you to assign it. And or if they’re have competent legal counsel, they may try to limit that assignment to, for example, a related entity managed by Ferd Niemann. Basically, my special purpose, LLC, that I’ll create for each property.
If I’m the actual end-buyer, I don’t care. It’s fine. I don’t mind that language, but if my goal is to assign the property, that language is going to make it tough. Cause it will be harder to assign it to somebody, another LLC that I manage. So, if I want to assign it to John Smith, John Smith is going to own 49% of the deal. Now that may not go well. So the next best watering down for you, the assigner is just hey, you know, ThirdFour Properties and or assigns assignment is limited to an LLC or other entity of which Ferd Niemann is a member. Then I could assign it to maybe some bigger operator and say hey, I need to have a 0.1% of the deal. Some small negligible amount, but at least honestly, be saying, I’m a member.
Frankly though, this only becomes an issue if the end buyer doesn’t close. If the end buyer does close and you are not a member of that LLC, then the actual seller of the property was not really harmed. They got what they wanted. They got somebody to pay them the money. Now, if this is a seller-financed deal, it gets hairier. And if it’s self-financed with recourse, it gets even harrier. I recently worked on a case for a client. He received an assignment from somebody else. He was the buyer in this case, in this case the assignee, and he paid, $50,000 or something. But it was a seller-financed deal. And there was personal recourse to the guy who tied it up. And the guy who tied it up, I’m sure thinks when he assigned it to my client, that my client took over, said recourse. But that is not what the documents said. I was an advocate, you know, in this case I was representing my, you know, my client was end buyer. So in theory, and then the letter of the paper, the letter of the law, if you will, if my client ends up defaulting and does not properly close out and purchase the property, the seller can come after and sue some guy named Todd, who I’ve never met, talked to or heard of, but old Todd had a crappy contract and did a crappy job of assignment. So, today’s lesson, don’t be Tod.
First, we’ve already jumped into, you know, how you get the assignment the rights. So next you’re going to put this into an assignment contract, I call it the assignment of contract for purchase and sale. It is your assignment document. You’ve got your basic, the parties who’s involved, the dates, the date of this consummation of the transaction here, whereas clause, whereas clauses will have things like, okay, the subject, property, address, and you’ve got therefore clauses, therefore, assignor grants, conveys assign transfer sets over blah, blah, blah, assigns the rights.
And then typically you want to have, if I’m the assignor and I’m sending it to you, I want to make sure that you have an assumption as the assignee and what are your actions or duties to perform. Now as the assignor, I should also do have like representations, covenants, warranties, basically say things like, look, I’m telling the truth that I’m actually the “buyer” under the purchase contract. That’s me. That ThirdFour Properties is my guy, my company. I’m authorized to execute this document, the contract that I’ve given you a copy of, if I’m buying an X mobile home park for a million dollars, that’s actually the real contract and there’s no amendments. And except for the members that I’m actually disclosing, first amendment and second amendment.
And then I’m going to reference this as a valid purchase contract in full force and effect. I’m not aware of anybody else that’s got rights to that property. And only the seller and me are the two people involved in the transaction, two people or entities. And then any, if there’s an earnest money deposit or something that I’ve already put down, let’s say I put down $10,000 earnest money, I’m going to say I already paid it and it’s going to become your property as the assignee. Because as part of my compensation, you’re going to give me back my earnest money so that if you turn into a pumpkin at midnight, I don’t lose 10 grand.
The assignment document should also reference the purchase price of the primary contract. Generally, there’s an indemnification provision where if I assign it to you and you end up crapping the bed I don’t have to get sued. And then we’ll reference it where the earnest money is currently, how much it is, how and when it’s released back to me.
Let me reference the assignment fee. This is why I’m doing this. This is why I’m assigning; I want to get paid. Someone say, how much am I getting paid? How am I getting paid? Typically, you know, the amount is in the industry. It’s, you know, anywhere from typically 2% to 5% of the purchase contract, but it’s a good deal. It’s a good deal. I had a nice deal in the contract and my assignment fee was going to be, it was 165 grand, the deal was 13 with 1.3 million. So I don’t know what percentage it was, but it was more than 10%. I was going to assign to this entity, ended up their lawyer got kind of their lawyer goofed and said, I don’t like your purchase contract. I’m like, what are you talking about? It’s good. And he goes, well, we can’t use it. So, we walked away. Well, it turns out the baby lawyer that did that ended up, when the boss got back in town, the boss lawyer’s like, no, the contract is good. He just calls it a different word. That’s the same thing. Oh, okay. Well, by that time I was out syndicating raising money for this. Cause I wouldn’t be able to get it assigned at time. I don’t want to lose my deal. So I ended up syndicating the deal and closing it myself, even though I was originally trying to assign it because I didn’t have enough money because it needed a bunch of cap-ex and I needed like 750K and I had like 30 days to raise it. Didn’t have 70K of my own laying around. So, I ended up raising it. And the syndication and bought the deal.
But anyway, the assignment fee, how much, how do you get paid? Typically, you get paid at closing. But sometimes you can get paid when you get paid is everything, you can get paid a portion now. And then where’s that portion held. I mean, maybe, if I’m assigning it to you and my total fee is $50,000, I could say, I want you to put all $50,000 down, hold it at a title company, but I may not want the seller to know this is going on, or you may not want it to go, so we may just put it in a different title company or a different attorney’s office, basically in escrow. And then I get it released, “released” to me at a minimum at closing, but I may put some timelines in there, like hey, after your due diligence period it expires. I may even negotiate and get $10,000 if it released to me now, but you just need to have that clear in your document. So that assignment fee verbiage is the most important piece to protect you. In this case, I’m saying me as the assignor, but also set forth the money piece. And then you’ve got your boilerplate language in the documents. You know, your successors and assigns, no modification, non-partnership, the entire agreement stuff, severability stuff, counterparts. We already covered that in previous episodes. And I’m assuming you’re listening to all of my episodes because why wouldn’t you, frankly, this is free information. This is like free lawyer stuff. But I’m not your lawyer. I might be your lawyer actually, but I’m not your lawyer by virtue of giving this information. So, no legal advice was given today. No malpractice coverage is in place. So, don’t call and sue me. If I’m wrong, which I’m not. I think I’ve been wrong once. I thought I was wrong, but I wasn’t. But because for a minute there, I thought I was technically wrong about that. Just kidding. That’s an old, it’s an old cheesy dad joke that I heard.
All right back to work here on our assignment document. You want to have a non-circumvention provision. We actually have a whole non-circumvention agreement that we referenced that we covered in a different episode. And then sometimes you want to have the inspection period referenced in here. So, if I’ve got this property under contract in my inspection period, for me, as the buyer, it says, I have to get off the pot by midnight on December 1. I probably don’t want to give you the opportunity to go quite that far. I may say you need to be two days heads up. If you bail. That way I can make crystal clear that I can bail properly and get my earnest money back and not get sued from the seller and all that kind of stuff. We’ve already covered those terms and releases of money, all stuff in the underlying purchase contracts. I’m not going to repeat them here.
It’s also possible. In mobile home parks, the due diligence periods are pretty short. You know, 30 to 60 days is pretty common. I used to do retail development and those were long due diligence periods because you had to get bids. You had to get civil engineering stuff. Sometimes you get rezoning. You had to get development, preliminary development approvals, sometimes tax incentives. So, it was not uncommon to have six months of diligence. And if I was the guy trying to flip the contract, then inspection is even more important because I may say I’m going to give John Smith the right to buy it, but he’s got to commit within the first three months. And if he says, no, at least I got a little bit more time to try to find John Smith 2.0, who’s hopefully my guy.
So I still have that provision in my document for MHP work, but it’s pretty tough to try to, if the first pony doesn’t work, you don’t have a lot of time to pick another pony. So, choose wisely. And then you got your signature block, you know, basic contract stuff. So anyway, that’s the ins and outs if you will, the fruit, if you will, as well for assigning a contract for purchase and sale. Until next time, God bless.