Marketing of Assigned Contracts... Legalities?

8 Replies

My partner and I flip, but since deals on the MLS are low, I have recently sent out mailers on Tuesday and have gotten several call backs (yay!). These people have invited us to their homes to inspect and make an offer.

Since we're looking to buy at ARV x 70% - repairs to flip, our offers are obviously low for most people. For example:

ARV: $150k completely rehabbed.

Fair market value now: $120k.

Seller owes $100k. Seller will accept $100k.

I need to pay: $75k (due to $30k rehab).

Since we’re further apart on an agreeable price, #1: Can I put the property under contract for $100k with an assignment contract, add a monetary “wholesale” fee for myself, and sell it to a regular family who will buy it for $120k and live there?

If I can assign the contract for a fee to an investor who will flip or rent it out, I should be able to assign it to an end home buyer who wants to live there, correct? It's sort of like a "FSBO scenario" in which I market the property I now control under contract.

#2: If I have an assignment clause in the signed contract, it is legal to indeed market it for sale (Craigslist, Hubzu, flat fee MLS listing), I believe I’ve read through my research???  (I'm also mailing this to my REI attorney this weekend to confirm just in case). I'm just trying to monetize each lead since I've received a fair number of callbacks from the 99 letters I sent. <--Spelled one wrong, so it wasn't 100, haha.

The devil is in the details but you should be able to do both #1 and #2. 

However if it is not a deal for you it isn't going to be a deal for anyone else. While a homeowner may be willing to pay that much it is simply not practical to market directly to home buyers. Also the financing of this kind of deal would be very tough for a home buyer.

@Ned Carey , thank you for the reply. My thinking was that it would not be a deal for me because I'd expect to do a full cosmetic remodel with my team, hence the need to pay such a low price to cover the rehab... Yet other regular homeowners have no problem purchasing the house around market/appraised value and fixing up little things over the next 5, 10 years while they live there.

^^I originally began to think this way because I keep getting beat out every week on buying foreclosures by regular homeowners who can afford to pay more and will fix up the little things that bother them as they live there, whereas I need to pay rock bottom dollar to to complete a full-flip and cover holding costs immediately.

The houses I'm trying to assign would be in good enough shape to qualify for conventional financing, however, are you implying banks won't lend because I'm trying to assign the contract?

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@Shannon K. the lender will not finance your assignment fee. That will make it harder for a homeowner to get approved. Some lenders may simply not allow it at all.

When marketing to investors, you are marketing to repeat buyers. You can build a list and those buyers will remain buyers even after they buy a property. They are looking for the next property. It is harder to reach home buyers. 

I am not saying it can't be done. I am saying it is harder which is why most investors don't do this.

Hello,

I don't know the owners situation but this has worked. Some owners just want out of the house. You could also buy the house as a Lease option, if the owner will, with the "assignment clause" in the contract. You have a 5 year Lease, with option, to the original owners. You tell them that you will be taking care of the mortgage payments to their lender, through a third party property manager. They worry about nothing, no payments, no repairs, etc. If you have the cash or hopefully you have a new buyer in line before you pay the seller. You give them $5-10,000 for the option to buyor a gift for move expenses, (you can have this deducted from the original purchase price upon acting on the option to purchase. It all depends on the owner and what takes to close the deal). You then lease, with option, to another buyer for 2 years. They give you $8-15,000 for the option, non-refundable. If they decide not to use the option in 2 years, you have time to do another lease option to a different buyer, or even purchase the property yourself! In a rare case you tell the owners they get their house back (could be good or bad for them, depending on their circumstances at that time, they may be happy to have the house back).

There are quite a few people that would like to buy a house but just can’t come up with the huge down that the banks or other lenders want. You help them get into a house and they have 2 years of making on time payments to get a refinance on the home for the balloon payment to you. I also put into the contract that the buyer pays all expenses under $2,000 (or what you feel appropriate for your area). Just like if they owned a home they would fix the little things, insurance would fix the other things. They must have renters insurance, just like they would be paying mortgage insurance. Insurance or you take care of big expenses. The new owners can make improvements to the house, or you can say “with written authorization” (though the last will make it not feel like their house). They usually do nice things because it is their house.

You make a little up front for the effort, the difference between the money you gave to the seller and what the new buyer pays for the "option". You will make more when the house sells, you bought it for $xxx and sell it for ARV (After Repair Value). The new buyer has a fixed sale price so they get any appreciation, just as if they bought the house at the time they signed the contract (a good plus to tell them). On top of this, the money that you are charging to lease to the new buyers is above fair value, so you have a little cash flow. The new owners have a house to call "theirs", and most all of them take really good of it, because it is theirs, unlike a rental.

Jacob

You need to check on state real estate laws as pertaining to licensure requirements. Some states consider attempting to sell property via assignment of contract, more commonly called wholesaling, to be real estate brokerage and requiring a real estate broker license.  If this is the case in your state, the second step is to check enforcement and penalties. Since regulators have a hard time connecting a straight line between assignment and brokering, enforcement tends to be limited to the most obvious cases.  In most instances, even if you are in technical violation of the law (and even that may be subject to interpretation), doing a single transaction, as opposed to a continuous business operation, would probably go unnoticed.  

To further clarify, your intent to market this property to the general home buying public brings you closer to brokerage requiring a license.  Flipping to a investor on the other hand, especially one you already have a relationship with, keeps you further away from licensure requirements. The reason is twofold. First, marketing or advertising a property you do not own, is an activity requiring licensure.  Second, selling to the general home buying public is exactly who license laws are trying to protect.  A real estate investor is less likely to need that protection.

IMO, state licensing laws would have to be rewritten to specifically include assignments before they can be used in that way on a mass scale.  Until that time comes, if it ever does, the careful flipper will probably be alright if they are doing just a few of these.

Thank you all for the replies. These things are essentially what I'm trying to do... creatively monetize each lead, if possible, since I've received positive responses thus far from my first mailing campaign. I'd really prefer to just purchase a house and flip it ourselves right away, but it seems many people owe much more than the house is worth (and need to short sale) or their house is not in "bad enough" shape to warrant such a low price to rehab & flip. I was looking for ideas for those particular instances to get creative :) If its not always a realistic option, that's no problem, I can move on.

@Don Konipol , if I were to "wholesale" a property, marketing of some sort is likely a given to find a qualified investor/buyer for whatever property I'm looking to assign... I previously researched that marketing it does not require a license since the signed contract gives me an "equitable interest" in the property and I am not selling the HOUSE, I'm selling the piece of paper contract... (ie. assigning the "rights and responsibilities" of the paper asset to a third-party/end-buyer). I'm honestly not sure on the marketing scenario of this and I'm not planning on coming across this too often. The lines are fairly blurry on marketing it, so I will wait for confirmation from my REI attorney. Thank you for the help.