Many new real estate investors contact me about forming a series LLC after they have signed a contract to purchase their first real estate investment. That in-and-of-itself is not a problem. The problem is that nearly all of these contracts are in the purchaser’s individual name which, more often then not, causes problems as closing approaches. Here’s how to avoid pre-closing headaches.
Most residential real estate transactions in Texas utilize the Texas Real Estate Commission’s One to Four Family Residential Contract (Resale). Section 1 of this contract defines the parties to the contract:
1. Parties: The parties to this contract are ___________ (Seller) and ___________ (Buyer). Seller agrees to sell and convey to Buyer and Buyer agrees to buy from Seller the Property defined below.
Many new real estate investors do not realize that this particular contract does not include an assignment clause (an assignment clause specifically grants a party to the contract the right to assign his or her rights to the contract to another person or entity; it can also specifically prohibit the assignment of a party’s rights).
If you use the TREC contract (or a similar contract that is silent regarding assignment) you should always define you, the buyer, as follows:
1. Parties: The parties to this contract are ___________ (Seller) and JOHN SMITH AND/OR HIS ASSIGNS (Buyer). Seller agrees to sell and convey to Buyer and Buyer agrees to buy from Seller the Property defined below.
The buyer’s solution: add “and/or assigns” to the definition of “Buyer” in the contract before the contract is executed.
The seller’s modification: require seller’s prior written approval before assignment or limit assignment to entities in which an individual buyer is affiliated.