Even the most left-brained, technical real estate practitioners may find themselves overwhelmed by the legal forms that have become synonymous with the investing industry. The “real estate assignment contract” strategy, in particular, has developed a confusing reputation for those unfamiliar with the concept of wholesaling. At the very least, there’s a good chance the “assignment of contract real estate” exit strategy sounds more like a foreign language to new investors than a viable means to an end.
A real estate assignment contract isn’t as complicated as many make it out to be, nor is it something to shy away from because of a lack of understanding. Instead, new investors need to learn how to assign a real estate contract, as this particular exit strategy represents one of the best ways to break into the industry.
In this article, we will break down the elements of a real estate assignment contract, or a real estate wholesale contract, and provide strategies for how it can help investors further their careers.
A real estate assignment contract is a wholesale strategy used by real estate investors to facilitate the sale of a property between an owner and an end buyer. As its name suggests, real estate contract assignment strategies will witness the owner of a subject property sign a contract with an investor that gives them the rights to buy the home. That’s an important distinction to make, as the contract only gives the investor the rights to buy the home; they don’t actually follow through on a purchase. Once under contract, however, the investor retains the sole rights to buy the home. That means they may then sell their rights to buy the house to another buyer. Therefore, when a wholesaler executes a contact assignment, they aren’t selling a house, but rather their rights to buy a house. The end buyer will pay the wholesale a small assignment fee, and proceed to buy the house from the original buyer.
The real estate assignment contract strategy is only as strong as the contracts used in the agreement. The language used in the respective contract is of the utmost importance, and should clearly define what the investors and seller expect out of the deal.
There are a couple of caveats to keep in mind when considering using sales contracts for real estate:
Contract prohibitions: Make sure the contract you have with the property seller does not have prohibitions for future assignments. This can create serious issues down the road. Make sure the contract is drafted by a lawyer that specializes in real estate assignment contract law.
Property-specific prohibitions: HUD homes (property obtained by the Department of Housing and Urban Development), real estate owned or REOs (foreclosed-upon property), and listed properties are not open to assignment contracts. REO properties, for example, have a 90-day period before being allowed to be resold.
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What Is An Assignment Fee In Real Estate?
An assignment fee in real estate is the money a wholesaler can expect to receive from an end buyer when they sell them their rights to buy the subject property. In other words, the assignment fee serves as the monetary compensation awarded to the wholesaler for connecting the original seller with the end buyer.
Again, any contract used to disclose a wholesale deal should be completely transparent, and including the assignment fee is no exception. The terms of how an investor will be paid upon assigning a contract should, nonetheless, be spelled out in the contract itself.
The standard assignment fee is $5,000. However, every deal is different. Buyers differ on their needs and criteria for spending their money (e.g. rehabbing vs buy-and-hold buyers). As with any negotiations, proper information is vital. Take the time to find out how much the property would realistically cost before and after repairs. Then, add your preferred assignment fee on top of it.
Traditionally, investors will receive a deposit when they sign the Assignment of Real Estate Purchase and Sale Agreement. The rest of the assignment fee will be paid out upon the deal closing.
Assignment Contract Vs Double Close
The real estate assignment contract strategy is just one of the two methods investors may use to wholesale a deal. In addition to assigning contracts, investors may also choose to double close. While both strategies are essentially variations of a wholesale deal, however, there are several differences that must be noted.
A double closing, otherwise known as a back-to-back closing, will have investors actually purchase the home. However, instead of holding onto it, they will proceed to immediately sell the asset without rehabbing it. Double closings aren’t traditional as fast as contract assignment, but they can be in the right situation. Double closings can also take as long as a few weeks. In the end, double closings aren’t all that different from a traditional buy and sell; they just transpire over a meeter of weeks instead of months.
Assignment real estate strategies are usually the first option investors will want to consider, as they are slightly easier and less involved. That said, real estate assignment contract methods aren’t necessary better; they are just different. The wholesale strategy an investor chooses is entirely dependent on their situation. For example, if a buyer isn’t able to line up funding fast enough, they may need to initiate a double closing because they don’t have the capital on hand to pay both the acquisition costs and assignment fee. Meanwhile, select institutional lenders incorporate language against lending money in an assignment of contract scenario. Therefore, any subsequent wholesale will need to be an assignment of contract.
Double closings and contract assignments are simply two means of obtaining the same end. That said, neither is better than the other; they are simply meant to be used in different scenarios.
Flipping Real Estate Contracts
Those unfamiliar with the concept of real estate contract assignment may know it as something else: flipping real estate contracts; if for nothing else, the two are one-in-the-same. Flipping real estate contracts is simply another way of assigning a contract.
How To Assign A Real Estate Contract
A wholesaling investment strategy that utilizes assignment contracts has many advantages, one of them being a low barrier-to-entry for investors. However, despite its inherent profitability, there are a lot of investors that underestimate the process. While probably the easiest exit strategy in all of real estate investing, there are a number of steps that must be taken to ensure a timely and profitable contract assignment, not the least of which include:
Find the right property
Acquire a real estate contract template
Submit the contract
Assign the contract
Collect the fee
Find The Right Property
You need to be able to prune your leads, whether from newspaper ads, online marketing, or direct mail marketing. Remember, you aren’t just looking for any seller: you need a motivated seller who will sell their property at a price that works with your investing strategy.
The difference between a regular seller and a motivated seller is the latter’s sense of urgency. A motivated seller wants their property sold, now. Pick a seller who wants to be rid of their property in the quickest time possible. It could be because they’re moving out of state or they want to buy another house in a different area ASAP. Or, they don’t want to live in that house anymore for personal reasons. The key is to know their motivation for selling, and determine if that intent is enough to sell immediately.
With a better idea of who to buy from, wholesalers will have an easier time exercising one of several marketing strategies:
Real Estate Meetings
Acquire A Real Estate Contract Template
Real estate assignment contract templates are readily available online. Although it’s tempting to go the DIY route, it’s generally advisable to let a lawyer see it first. This way, you will have the comfort of knowing you are doing it right, and that you have counsel in case of any legal problems along the way.
One of the things proper wholesale real estate contracts add is the phrase “and/or assigns” next to your name. This is a clause that will give you the authority to sell the property, or assign the property, to another buyer.
You do need to disclose this to the seller, and explain the clause, if needed. Assure them that they will still get the amount you both agreed upon, but that it gives you deal flexibility down the road.
Submit The Contract
Depending on your state’s laws, you need to submit your real estate assignment contract to a title company, or a closing attorney, for a title search. These are independent parties that look into the history of a property, seeing to it that there are no liens attached to the title. They then sign off on the validity of the contract.
Assign The Contract
Finding your buyer, similar to finding a seller, also requires proper segmentation. Whether you found buyers via online marketing or real estate listings, make sure your contract includes language that covers earnest money to be paid up front. This grants you protection against possible breach of contract.
This also gives you assurance that you will profit, whether the transaction closes or not, as earnest money is non-refundable. How much it is depends on you, as long as it is properly justified.
Collect The Fee
Your profit from a deal of this kind comes from both your assignment fee, as well as the difference between the agreed-upon value and how much you sell it to the buyer. If you and the seller decide you will buy the property for $75,000, and you sold it for $80,000 to the buyer, then you profit $5,000. The deal is closed once the buyer pays the full $80,000.
Assignment Contract Pros
For many investors, the most attractive benefit of an assignment of contract is the ability to profit without ever purchasing a property. This is often what attracts people to start wholesaling, as it allows many to learn the ropes of real estate with relatively low stakes. An assignment fee can either be determined as a percentage of the purchase price, or as a set amount determined by the wholesaler. A standard fee is around $5,000 per contract.
The profit potential is not the only positive associated with an assignment of contract. Investors also have the benefit of not being added to the title chain, which can greatly reduce the costs and timeline associated with a deal. This benefit can even transfer to the seller and end buyer, as they get to avoid paying a real estate agent fee by opting for an assignment of contract. When compared to a double close (another popular wholesaling strategy) investors can avoid two sets of closing costs. All of these pros can positively impact an investor’s bottom line, making this a highly desirable exit strategy.
Assignment Contract Cons
Although there are numerous perks to an assignment of contract, there are a few downsides to be aware of before searching for your first wholesale deal. Namely, working with buyers and sellers who may not be familiar with wholesaling can be challenging. Investors need to be prepared to familiarize newcomers with the process and should be ready to answer any questions. Occasionally, sellers will purposely not accept an assignment of contract situation. It’s important for investors to be prepared before running into these situations, as to not get discouraged.
Another obstacle wholesalers may face when working with an assignment of contract is in cases where the end buyer wants to back out. The best way to protect yourself from situations like this is to form a reliable buyer’s list and secure contract process. Keep in mind that while there are cons to this real estate exit strategy, the right preparation can help investors avoid any big challenges.
As with any part of the real estate investing trade, no one, single aspect will lead to success. However, understanding how real estate assignment contracts work is a vital part of this business. When you comprehend the many layers of how contracts are assigned—and how wholesaling works from beginning-to-end—you’ll be a more informed, educated and successful investor.
Do you have a real estate assignment contract question? Any part of the contract process got you confused? Let us know in the comments below.