Contracts do not always stay with the original party who signed them. In some situations, one party may transfer their rights under an agreement to someone else. This process is known as an assignment of contract. In this guide, you'll learn what an assignment of contract is, how it works, when it can be used, and how it differs from other ways of transferring a contract.
Can You Transfer a Real Estate Contract to Someone Else?
Yes, you can transfer a real estate contract to someone else in many cases, but only if the purchase agreement allows the assignment and any required approvals are obtained. This process is called an assignment of contract, which allows the original buyer to transfer their contractual rights to another person before the transaction closes.
An assignment of contract does not transfer ownership of the property. Instead, it transfers the original buyer's rights under the purchase agreement to a new buyer, who then moves forward with the transaction according to the terms of the existing contract. The property itself is not transferred until the closing is completed.
What Is an Assignment of Contract?
An assignment of contract is the transfer of one party's contractual rights to another person or entity. In a real estate transaction, this means the original buyer transfers their rights under the purchase agreement to a new buyer, who takes their place in the transaction.
The original purchase agreement does not change or get replaced. Instead, the existing contract remains in effect, and the new buyer assumes the contractual rights that were assigned to them under its terms.
Is Assignment of Contract Only Used in Real Estate?
No. The assignment of a contract is used in many industries and is not limited to real estate transactions. It can also be used to transfer rights under business agreements, commercial and residential leases, service contracts, intellectual property agreements, and other types of contracts.
While assignment of contract has many uses, this article focuses on real estate because it is one of the most common situations where buyers, sellers, and investors encounter the process.
How Does an Assignment of Contract Work?
The Buyer Transfers Their Rights
The assignment process begins when the original buyer, known as the assignor, decides to transfer their contractual rights to another person, known as the assignee. The assignee agrees to step into the buyer's position and continue with the transaction under the existing purchase agreement.
An Assignment Agreement Is Executed
To complete the transfer, the assignor and assignee sign an assignment agreement. This document outlines the transfer of the buyer's contractual rights and any agreed-upon terms between the parties. The original purchase agreement remains in effect and continues to govern the transaction.
The Sale Proceeds to Closing
After the assignment is completed, the assignee moves forward with the purchase and completes the transaction at closing. In some cases, the assignor receives an assignment fee, which is an amount the assignee agrees to pay in exchange for taking over the contract.
When Is an Assignment of Contract Allowed?
The Agreement Must Permit Assignment
Not every real estate contract can be assigned. Whether an assignment is allowed depends on the terms of the purchase agreement. Some contracts expressly permit assignments, while others prohibit them or place conditions on when they can occur.
Before attempting to transfer a contract, review the assignment clause carefully. This section explains whether assignment is allowed and outlines any requirements that must be met before the transfer can take place.
Seller Consent May Be Required
Even if the purchase agreement allows an assignment, the seller's written consent may still be required. Some contracts let the buyer assign their rights without approval, while others require the seller to agree before the assignment becomes effective.
Because these requirements vary from one contract to another, it is important to review the purchase agreement to determine whether seller approval is necessary.
Why Would Someone Use an Assignment of Contract?
Real Estate Investment
Real estate investors, particularly wholesalers, often use an assignment of contract to transfer a purchase agreement to another buyer before closing. Instead of purchasing the property themselves, they assign their contractual rights to another investor or buyer, who completes the purchase. This allows investors to secure a property and find an interested buyer without taking ownership of the home.
A Buyer's Circumstances Change
An assignment of contract can also help buyers whose plans change after signing a purchase agreement. For example, a buyer may experience financial difficulties, accept a job in another city, or face unexpected personal circumstances that prevent them from completing the purchase. Rather than letting the transaction fall through, they may assign their contractual rights to another qualified buyer if the purchase agreement allows it.
What Are the Benefits and Risks of an Assignment of Contract?
Benefits
An assignment of contract can benefit everyone involved in the transaction. The original buyer may recover value from the purchase agreement instead of walking away from it. The new buyer has the opportunity to step into an existing contract without negotiating a new purchase agreement from the beginning. For the seller, the transaction may still move forward as planned without having to find another buyer and start the sales process over.
Risks
An assignment of contract also comes with potential risks. Depending on the terms of the purchase agreement, the original buyer may remain responsible for certain contractual obligations even after assigning their rights. Financing issues or delays in obtaining any required approvals can also prevent the transaction from closing. In addition, failing to follow the contract's assignment requirements may make the assignment invalid, which could affect the sale.
Assignment of Contract vs. Novation
Assignment Transfers Contractual Rights
An assignment of contract transfers the original buyer's contractual rights to another party, but it does not always transfer their contractual obligations. Depending on the terms of the purchase agreement, the original buyer may still be responsible if the assignee fails to fulfill the contract. For this reason, an assignment does not necessarily remove the original buyer from the transaction entirely.
Novation Replaces the Original Party
A novation is different because it replaces the original party with a new one through a new agreement. Once all required parties agree to the novation, the new party assumes both the rights and obligations under the contract. In most cases, this releases the original buyer from future contractual responsibilities, making novation a more complete transfer than an assignment of contract.
