During the processing of a real estate sale transaction, the settlement agent may receive an assignment of the purchase agreement to a new buyer. The principals to the transaction will then change. The transaction will involve the seller/property owner and a buyer/assignee. The original buyer/assignor is no longer a principal to the transaction.
If a settlement agent is presented with an assignment of a buyer’s right title and interest in a purchase agreement, the purchase agreement must be reviewed to determine how to proceed. There are four possibilities:
- The agreement may prohibit an assignment to the new buyer.
- The agreement may name a purchaser and state “and/or assigns.”
- The agreement may allow for an assignment to a new buyer as long as the seller gives their written consent; or
- The agreement may fully address future assignments and provide the seller’s consent at the time the agreement is signed with no need for future seller consent once the ultimate buyer is found.
The assignment agreement also needs to be reviewed to determine if the following matters have been addressed:
- Assignment of the existing buyer’s right, title and interest in the purchase agreement.
- Acceptance of the new buyer’s appointment and an acknowledgment the new buyer has read and understood all the terms of the purchase agreement.
- The seller/property owner’s consent to the assignment and substitution of a new buyer, if required.
- Assignment or replacement of any required deposits.
If those items are not addressed, then Assignee Instructions must be approved by the seller/property owner, buyer/assignor and buyer/assignee. Once that task is completed, the title officer needs to be advised of the new buyer and an amended report prepared.
If the assignor and assignee have their own written assignment agreement, the settlement agent should review the agreement to ensure it does not extend the settlement agent’s role. In other words, settlement agents should not agree to handle additional responsibilities such as assignment of earnest money (in addition to the purchase earnest money) or other terms not required or essential to the underlying sale of property. Also, once the amended, or new, purchase agreement is assigned, the assignor is no longer a principal to the purchase, thereby limiting the relationship between the settlement agent and assignor.
If the assignor and assignee submit a separate agreement for an assignment fee to be paid to the assignor, the amount of the fee must be reported to the Internal Revenue Service (IRS). The assignment fee is reported on a 1099-Miscellanous (1099-MISC), unless the assignment fee paid is $600 or less.
Settlement agents must conduct a search of the Specially Designated Nationals (SDN) List to determine if the assignor is on the SDN List, in addition to other SDN searches that the purchase transaction may otherwise require.
If an assignment fee is paid, the assignee is paying more than the purchase price for the property. This means that, if the assignee is obtaining financing to purchase the property, the assignee’s lender will have to approve the payment of the assignment fee to the assignor prior to closing.
To further demonstrate the potential complications of a purchase agreement assignment, we review some specific scenarios below:
Scenario #1
The assignment agreement calls for the new buyer/assignee to replace the existing earnest money deposit in the amount of $50,000. Under the terms of the agreement, the existing deposit is required to be returned to the assignor/buyer immediately upon execution of the assignment agreement.
What could go wrong?
Returning the initial deposit to the buyer/assignor without first depositing and collecting on the second deposit presents a dilemma. If the second deposit does not pay at the bank and the transaction cancels, then the seller’s right to demand the earnest money deposit by evoking the liquidated damages option under the purchase agreement has been jeopardized.
Solution
If the assignee will be replacing the existing earnest money deposit with a new deposit, the initial deposit cannot be released to the depositor until the replacement deposit has cleared the bank.
Scenario #2
A third party deposits the earnest money. The purchase agreement is assigned but the assignment does not state whether the initial earnest money is being assigned to or replaced by the assignee. The transaction falls apart. Who receives the deposit?
Solutions
If the deposit is not forfeited to the seller under the terms of the cancellation instructions, then it would go back to the original depositor. If third party deposit instructions have been signed by the depositor and the assignee, then the deposit is returned to the buyer/assignee. In addition, the assignment should address whether or not the deposit has been transferred along with the rights under the purchase agreement to the assignee.
Scenario #3
Rather than having a separate assignment agreement, the assignor creates a new purchase contract with an increased sale price. The difference between the initial price and the increased price is to be paid to the assignor.
Reasons this structure does not work:
- If the sale price is increased, the closing costs (calculated as a percentage of the sale price) increase incrementally for the seller who had nothing to do with creating the assignment.
- The state and federal reporting of the sale price with the seller’s taxpayer identification number increased to the new sale price and will likely cause the seller to pay additional capital gains taxes.
- The commission, based on a percentage of the sale price increases as well.
Solutions
The assignor and assignee should memorialize their arrangement in a separate Assignment Agreement. They should notify the settlement agent, who should prepare Assignee Instructions for the seller/property owner and buyer/assignor and new buyer/assignee to execute memorializing the assignment.
In the instructions, the assignor relinquishes all of their right, title and interest in and to the subject transaction and the property and assigns all such rights to the assignee. The assignee then ratifies all the terms and conditions of the purchase agreement as the new buyer.
If an assignment fee is due, the assignor should remit an invoice into escrow and complete the Assignor Tax Information for 1099-MISC form. At closing, the fee is paid to the assignor.
In conclusion, there are many more scenarios that arise in an assignment. Settlement agents should consult with their management team when handling any assignment of a purchase agreement with terms unfamiliar to them.
