Sometimes, a real estate purchase agreement will start with one buyer or buyers and end up with another (or several others). This can be by design or because a confluence of circumstances brings unexpected changes. If buyers and sellers don’t plan ahead, the need for a change can put people in awkward or unpleasant positions.
From the perspective of a seller, I always recommend including contract language that prevents a change in the named buyer(s) without the seller’s consent. This helps the seller limit risk.
Let’s say Junior wants to buy a house but he doesn’t have the income to qualify for a home loan. His parents agree to co-sign on the loan and be listed on the title as co-owners of the property. Everyone’s happy and the contract is signed. Then, Junior gets a job and qualifies to purchase home on his own, barely. While this was buyers’ goal all along, the seller may prefer the stability of the combined financial position of Junior and his parents. So, even if Junior’s parents want to withdraw from contract, the seller may opt for the security of having them around until escrow closes.
Occasionally, a buyer wants to mask their involvement in a transaction. Let’s say my nemesis has a nefarious plot to purchase property I own, but he knows I’ll never sell to him. If I don’t include language in the contract securing my right to veto any change in buyer, my nemesis could ask his accomplice to negotiate the sale and then assign her interest in the sale to him. (For the record, I don’t actually have a nemesis.)
From the buyers’ perspective, they may want to “assign their interest” in the purchase agreement. This can be done in one of three ways: 1. A partial assignment, which adds a new buyer alongside the existing buyer, 2. A total assignment, which swaps out one buyer for another buyer, or 3. An other assignment, which deletes or replaces a buyer or buyers, while at least one original buyer remains in the transaction.
Sometimes when a big corporation purchases property, their real estate division negotiates the details of the contract using themselves as the buyer and then, at the very end, names the subsidiary that will serve as legal owner and hold title.
Just because a buyer’s interest in the ownership of a property is removed from the contract, the buyer may still have contractual obligations. For example, if the transaction falls out of escrow, the original buyer may remain on the hook for their share of the deposit. If a liquidated damages clause was not signed, the buyer could be on the hook for a lot more. (Learn about liquidated damages at selzerrealty.com/2017/02/27/can-i-get-my-deposit-back).
Note, if the ultimate buyer is a real estate agent involved in the transaction, this must be disclosed up front. Otherwise, the agent would be violating the “secret profit” prohibition. When real estate agents represent clients, they have a fiduciary responsibility to their client, meaning they must put their client’s interests before their own. In short, they must disclose any financial interest they have in the transaction from the beginning. If the real estate agent were a secret buyer, both the agent and the straw buyer (the one initially named in the contract) would be legally liable.
Also, getting cold feet does not give a buyer the right to assign his interest to just anyone. If the primary buyer wants to transfer his interest to another buyer but doesn’t have a contingency to remove himself from the contract and/or the new buyer does not have the capacity to perform (that is, doesn’t have the money to complete the transaction), then the existing buyer remains in place.
Alternatively, if a buyer wants to change the way she holds title, for example, from her name to the name of her family trust, this is fine. It has no material effect on the contract because all the players remain the same. The risk doesn’t change.
If you’re in the middle of a transaction to buy or sell property and the players start changing midstream, I recommend working with a real estate lawyer who can help you navigate the situation.
If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
