How a memorandum of contract affects assignment deals

What a memorandum of contract really is

A memorandum of contract is a short, recordable document that states a contract exists between a buyer and seller for a specific property. It typically includes the parties' names, the property address, and a reference to the underlying purchase and sale agreement. It does not disclose the price or specific terms of the deal, just that a binding agreement is in place.

This document is not the contract itself; it is merely an abstract or notice of the contract. Its purpose is to notify the public, and specifically any other potential buyers or creditors, that you, as the buyer, have a claim to the property. It acts as a shield for your equitable interest.

Think of it as putting a flag on the property. That flag tells everyone, 'Someone else has a claim here.' This can deter other investors or buyers from attempting to cut a separate deal with the seller, which is a common fear in wholesale transactions.

Why recording this document matters

Recording a memorandum of contract with the county recorder's office makes your interest in the property a matter of public record. Without it, your contract is generally only known between you and the seller. If the seller decides to try and sell to someone else, that new buyer might not know about your existing contract.

When a memorandum is recorded, it creates what's called 'constructive notice.' This means that anyone doing a title search on the property will see your recorded memorandum. This makes it much harder for a seller to claim he or she was unaware of your contract, or to sell the property out from under you to a third party.

This public notice can prevent a seller from entering into a second contract or attempting to relist the property with an agent. It locks down your position and protects the assignment process. It's a proactive step to secure your deal, especially if you anticipate a long closing period or a potentially difficult seller.

How it protects your assignment

In an assignment deal, you secure a property under contract and then find an end buyer to take over that contract. Your ability to assign hinges on having a valid and enforceable contract with the original seller. If that contract is jeopardized, your assignment fee disappears.

A recorded memorandum prevents the seller from selling to another buyer without first addressing your recorded interest. If another buyer were to purchase the property without your memorandum being released, they would likely take title subject to your equitable interest, causing a major headache for them and potentially forcing the seller to resolve your claim.

This leverage is crucial in wholesale deals. It provides a layer of security that ensures your hard work in finding the deal and the end buyer is protected. It reduces the risk of the seller backing out or attempting to renegotiate terms after you have secured your buyer.

Risks of recording a memorandum

While a memorandum offers protection, it's not without its downsides. If your deal falls through and you fail to release the memorandum, it can become a cloud on the seller's title. This can prevent the seller from selling the property to anyone else until your memorandum is cleared, even if your contract is no longer valid. This is not legal advice.

Some sellers might also be hesitant to sign a memorandum or may get upset if you record one without their explicit understanding. It's a good practice to be transparent about its purpose if you intend to use one. You need to explain what it is and why it benefits both parties by providing certainty.

When to use a memorandum

Consider using a memorandum in situations where you believe the seller might be tempted to entertain other offers, has a history of changing his or her mind, or if the closing period is extended. It's particularly useful for high-value properties or deals where you invest a significant amount of time and resources.

If you are dealing with a property that might have multiple interested parties or is attracting a lot of attention, recording a memorandum can solidify your position. It’s a tool for peace of mind when the stakes are higher. However, remember it's not a substitute for a solid contract and good rapport with the seller.

For more on deal structures, check out our guide on /compare/ppc-seller-leads to see how different lead types might influence your approach, or /learn/what-is-a-motivated-seller-lead for understanding seller motivations.

State-specific considerations

The rules and effectiveness of a memorandum of contract can vary significantly by state. Some states have specific requirements for what must be included in the memorandum, while others may not recognize its enforceability in the same way. Always consult with a local real estate attorney to understand the laws in your jurisdiction before using a memorandum of contract. This is not legal advice.

Understanding your state's laws will help you draft a compliant document and ensure it provides the intended protection. It will also clarify your obligations if the deal does not close, such as the requirement to promptly release the memorandum.