The real estate world is filled with jargon. If you’re new to the field—and especially if you’re interested in wholesaling—here’s a term you need to know: assignment of contract. Short and simple, you:
- Find a property significantly below market value
- Look for another buyer—normally a real estate investor—willing to pay a higher price
- Assign the contract to the new buyer, who then purchases the property.
What’s the point of this practice? During a prime selling season, investors are super busy trying to lock down as many properties as possible. They’re looking to get their hands on almost anything that will generate a profit. Hunting for cheap houses occupies a ton of time—so instead, they turn to wholesalers. These investors focus on finding good deals, and leave the flipping, renting, and other elements to other pros. During a hot market, we recommend riding the storm and assigning as many real estate deals as possible.
Is an Assignment of Contract Legal?
Yes—assuming it’s allowed in the terms of your agreement with the seller.
In the past, investors would simply put “John Doe and/or assigns” as the purchaser under the contract. This worked up until 2008, when banks started objecting to this clause in contracts for real estate owned (REO) properties. Your milage may vary with individual homeowners. Investors have received quite a bashing, so this clause may make a seller uncomfortable.
One solution: Write up your agreement with a trust or LLC as the purchaser. By using an entity, you have the ability to assign it to another investor because the contractual rights are under the entity, not the individual.
How Does Contract Assignment Work?
1. Find a motivated seller
First, let’s understand what a motivated seller is. This is an individual who needs to sell a property quickly. There is usually some sort of distress going on in their lives, like a job transfer, or perhaps they’re burdened with an inherited property. Keep in mind that a huge gap exists between wanting to sell and needing to sell. Knowing which category your seller falls into—it helps you know how to handle the situation.
- Need to sell: “I have to sell this house now because I’m moving to Maryland to take care of my ailing mother, and I have no other family members in the area.”
- Want to sell: “I’m curious to see what my house is worth because I may be selling next year.”
There is a definitive reason behind the need-to-sell scenario. In the second one, there is mere curiosity.
There are numerous ways to find motivated sellers, such as driving for dollars, newspaper ads, internet marketing, and direct mail marketing. If you begin to research real estate marketing, you will find many options—but make sure you use a combination of these strategies.
2. Get the contract
There are many assignment contract templates on the internet; however—at the very least—make sure an attorney has read and approved the document. There are two reasons this is so critical.
- Comfort knowing your contract is legally sound
- The ability to use that attorney as counsel in the event you find yourself in litigation.
There is critical verbiage that needs to be added to your assignment contract: “and/or assigns.” These three words authorize you to reassign the property to another interested buyer who is interested in the property. (Be sure to read your purchase agreement with the seller extremely carefully.) When you receive the signed contract, you now have equitable interest in the property and have some legal standing in what happens.
If reassigning is indeed allowed, include a provision in your contract that clearly explains that you, as the buyer, are a real estate investor and that you intend to assign the contract to a new buyer. Have the seller initial the provision. This reduces the likelihood of a seller objecting to the new purchaser and attempt to back out of the agreement. Assure them that they will still receive the agreed-upon purchase amount.
3. Submit contract to title
This process may differ in each state, but there is normally either a title company or a closing attorney that will conduct a title search. The title search will check the historical records of the property to make sure there are no liens on the property. It is important not to sell a property with a defective title. The title company or the closing attorney is an independent third party hired to make sure the deal is fair as agreed upon in the contract.
4. Assign the contract to the buyer
Yep: more marketing. Working to find your end-buyer, or assignee, can be daunting, but once you have a solid buyer, you can begin the process of closing the transaction.
When you find your buyer, ask for a nonrefundable earnest money deposit. Make sure your agreement contains language that specifically deals with earnest money—e.g., “The assignee will reimburse the assignor for the money paid up front.” You do not want the assignee to breach the agreement, which would result in you losing your earnest money.
When the buyer deposits the earnest money, you then know they have a genuine interest in the property and are willing to move forward. This fee is normally held by the title company or the closing attorney.
5. Get paid!
You get paid when the end-buyer wires the funds for the deal. This money will cover what you stated you were willing to buy the property for from the seller, as well as your fee for facilitating the transaction.
As an example, if you told the seller you would buy the house for $45,000 and you then sold your interest in the property to the buyer for $50,000, then your assignment fee is $5,000.
Note: Never refer to the assignment fee as a finder’s fee. These are two very different things.
It is standard practice that assignments are done only for profits of $5,000 or less. But if you are comfortable with the seller and the buyer, it’s possible to assign a contract for a much higher fee.
In the event you are not comfortable with all parties in the transaction, a double (or simultaneous) close keeps both legs of the transaction anonymous. Be aware: Not all title companies will agree to conduct a double close, so this needs to be discussed in advance.
Contract assignment cannot be done on all transactions. HUD homes, REOs, and listed properties have many barriers to this type of transaction. With many REO properties, the lender will ensure there is a seasoning period—normally 90 days—before you can resell the property. But as you can see, there are some clear benefits to contract assignment for big paydays.
Investors: Have you ever assigned a contract? Any questions about this process?
Let me know your thoughts with a comment!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.