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What Real Estate Investors Need to Know About Assignment of Contract


Jun 21, 2020 by Matt Frankel, CFP

There are several ways to invest in real estate beyond the well-known methods of buying rental properties or fixing and flipping houses.

One interesting, and potentially lucrative, way to make money in real estate is by wholesaling properties. This essentially means that you find real estate deals that you don’t actually intend to buy but plan to transfer to another buyer. In order to do this, you need to use a legal principle known as assignment of contract.

With that in mind, here's what assignment of contract means and how you can use it to profit from real estate deals without having to put up any of your own capital to acquire a property.

What is an assignment of contract?

Assignment of contract occurs when a party to an existing contract transfers the contract's legal obligations to another party. As a basic example of an assignment of contract, if you sign a contract with a landscaping company to mow your lawn every two weeks and the landscaping company assigns your contract to another company in the area, the new company is assuming the obligations (mowing your lawn) and benefits (collecting payment) of the contract.

Now, depending on the language in the original contract, such a change may not be allowed -- at least not without your consent. Some contracts prohibit assignment altogether. Others allow assignment of contract, but only if the other party to the contract (you, in the landscaping example) agrees to the change.

Assignment of contract as a real estate investment strategy

One real estate investment strategy that has gained popularity in recent years is known as wholesaling. This strategy involves an investor (wholesaler) negotiating a purchase contract with a seller and subsequently assigning that real estate contract to a buyer, collecting an assignment fee for their efforts. This is also known as flipping real estate contracts.

Here's a key point about real estate purchase contracts: A real estate contract isn't necessarily an obligation for a particular individual to purchase a home. Rather, it gives the individual the right to buy that particular home, but that right can be sold to another purchaser if the terms of the contract allow it.

As an example, let's say that I'm a real estate investor and want to find bargain-priced properties that are going to produce excellent cash flow. The only problem is that I don't have the time or the negotiation skills to find the truly good deals. However, by working with real estate wholesalers, I can be assigned a contract that was previously agreed upon in exchange for a fee.

How does real estate wholesaling work?

The main idea behind real estate wholesaling is simple. First, you find a property whose seller is willing to accept significantly less than market value in exchange for a quick and easy sale. Then, you find another buyer who is willing to pay slightly more than the contract price, and you assign the contract to them and profit from the difference. Of course, this is easier said than done.

Real estate wholesalers use several techniques to find properties for sale. Many use direct mailers, market their willingness to buy houses online, place newspaper ads, and use other strategies to find sellers. Most use a combination of several strategies to give themselves the best chance of successfully finding a deal. For example, if you've ever seen a sign about buying ugly houses in your town, it was probably placed there by a wholesaler.

For the business model to work, a wholesaler needs to target situations where a homeowner needs to sell their home as quickly as possible. Maybe the house needs repairs that they aren't willing to make, but they need to move out of state for a new job. Or maybe they are behind in their mortgage payments and selling quickly could help get them back on their feet financially. The point is that these situations generally take quite a bit of work to find.

Once a seller is located and a price is agreed upon, the wholesaler will use a real estate assignment contract to finalize the purchase agreement, and they will make clear to the seller that the contract may be assigned to another buyer before the agreed-upon closing date. The wholesaler then submits the contract for a title search (and likely has an attorney take a look at it), and as long as the title search is clear, the wholesaler will then try to find an end buyer for the property.

How much do wholesalers make for assigning contracts?

Being a real estate wholesaler is not easy. It can be a very difficult process to find real estate deals that are attractive enough that an end buyer would willingly pay an assignment fee and still feel like the property is a good deal. Wholesalers often find off-market deals -- meaning properties that were never listed on the multiple listing service (MLS) -- and spend countless hours doing their homework to find potential sellers.

Having said that, real estate wholesaling can be quite lucrative. Assignment fees can vary depending on the specific deal, but $5,000 seems to be a pretty standard amount.

As an example, let's say that a property would ordinarily have a market value of $200,000, but for whatever reason, a wholesaler determines that the seller is willing to take $150,000 to unload the property quickly and as-is. Even after adding a $5,000 assignment fee to the deal, an end buyer is still getting the property at a considerable discount.

Benefits and drawbacks to real estate wholesaling

Wholesaling can be an appealing way to get started in real estate investing because it can be done with virtually no startup capital. The entire process of finding sellers, conducting a title search, and finding an end buyer can be done for very little money, especially when you compare it with the cost of actually buying a property.

And as you can see from the fee discussion in the last section, there's a high potential for profit in a relatively short time frame. Real estate wholesalers who are good at what they do can earn an excellent return on their time.

On the other hand, wholesaling can be challenging and isn't a good fit for everyone. It can be very difficult to find sellers willing to part with their homes for a significant discount to market value. And there are cases where end buyers may back out of the contract, leaving the wholesaler on the hook for buying the property or quickly finding someone else to assign the contract to.

Important considerations

If you're considering getting into real estate wholesaling, the most obvious thing you need to do is to make sure that every contract you sign permits assignments or has an assignment clause. Two specific types of properties wholesalers should know to avoid are HUD-owned homes and foreclosed properties, as contracts involving these properties are always ineligible to be assigned.

The Millionacres bottom line

Assignment of real estate contracts can be a profitable way to invest in real estate without much of an upfront capital commitment, but it's not right for everyone. There's no free money in real estate, and wholesaling can be a very difficult skill to master, so be prepared to learn all you can about the process and best practices for finding sellers and end buyers before you get started.

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