Wholesale Real Estate Investing: Contract Assignment
Real estate investors who buy properties directly from motivated sellers must adopt wholesale real estate investing in their business. They must buy the properties low enough so that they can sell them at wholesale prices and still make a profit.
In contract assignment, you assign the right to buy a property to another person, usually a real estate investor.
In other words, you simply change the name of the buyer to the real estate investor for an assignment fee.
Everything else on the contract remains the same.
How does it work?
The following simple steps describe the process of assigning a contract
1) Get the property under contract
Once you identify a property from a motivated seller, you put it under contract. The contract must explicitly state that it can be assigned to another buyer.
You can do this by putting "and or assigns", e.g. "My Company Name and or assigns".
If you exclude this little clause, you may be unable to get the contract assigned. It is important to let the seller know that you might assign the contract to another real estate investor.
I also tell them that I could partner with another real estate investor. The important point is to let them know that the end result will be the same, and that you will make some profit out of the deal.
2) Get title work done
A title company or closing attorney usually acts as the closing agent.
3) Sign the assignment contract
You then sign a contract where you assign your right to buy the property to a real estate investor buyer.
Remember you must collect earnest money when you sign the contract. This earnest money is paid to the title company. Usually I credit the earnest money to the deal at closing; if they do not close the deal they stand to lose it.
4) Close the deal
The buyer then gets the transaction funded ready for closing. At closing, you will get your check for the assignment fee.
Advantages and disadvantages of contract assignment
When you assign a contract, you eliminate the need to close two transactions in incur two closing costs.
The assignment fee stated in the contract is what you walk home with.
It is important to show the assignment fee in the contract.
This is also included in the HUD1, meaning that all parties involved including the seller know the profit you make in the deal.
Be careful not to lose the deal because some seller or buyers could develop cold feet when they see how much you are making. To eliminate this risk, I only do assignment of contract when I stand to make little money. If I stand to make $5000 or more, I do simultaneous closing instead.
It is also impossible to assign some deals such as REOs and deals involving a Realtor. Such contracts usually specifically disallow contract assignment.
The biggest advantage is that even with little to no money, you can make a deal happen and walk away with a profit.
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