When Are Assignment Fees Paid?

Question

I came across an interesting thread on when assignment fees are paid here on BP with the title Paid at Closing vs. Paid at Assignment. It raised a couple of questions in my mind about the risks of wholesaling, namely the implications in the event that you assign a contract and the buyer backs out.

It seems to me that Paid at Assignment would both:

• Result in committed assignees, otherwise they would risk losing the money they paid the assignor, and
• Provide the assignor with a significant cash cushion against breach of contract if they cannot locate another buyer prior to closing, and ultimately decide to cancel the contract with the property owner.

But this raises another question. Let's say you execute a P&S with the property owner and give them an EMD of $500. You assign the contract to a real estate investor and receive a fee of $10k at assignment. The investor fails to close and you cannot find another buyer in time, so you cancel the contract with the property owner and forfeit the EMD of $500.

But you've essentially made $9,500 for breaching the contract! This can't be right and I would suspect it would create serious problems for the wholesaler.

Does anyone have experience with this type of situation that they could share?

Brian Jordan · Answer

@Alan Johnson Definitely a lot of working parts. Yes, the deposit is refundable only if we can not deliver free and clear marketable title. If the seller cannot/does not perform, the money is refunded to the buyer. A seller backing out can cause significant problems for sure. I will only contract deals that I'm sure we can move. Typically, we have multiple buyers for every deal we put out. In that scenario, we just move on to the next Buyer. If the seller is in a position where they absolutely need to close, we have transactional lending that we use for anywhere from 48hrs to 30 days. I'm a licensed agent so we'll just close on them and immediatley list it on the MLS if we haven't already found the next Buyer.

Tom Gimer · Answer

Any buyer willing to pay a $10k assignment fee up front is going to close.

A better question is what happens if the SELLER can't close in that scenario.

Accordingly, many assignment fees are paid in 2 stages... 1 at time of assignment (often into escrow) and the balance at closing.

Brian Jordan · Answer

@Alan Johnson When wholesaling properties, we require a $2,000 non-refundable deposit paid directly to our company. The remainder of the assignment fee is paid at closing. The deposit we require is NOT earnest money. It is a non-refundable deposit that will be credited towards the purchase price. If a Buyer absolutely insists on placing it with the title company then we require that they sign a Release of Earnest Money at that time before the contract is considered executed. If they try and back out and the closing date in the contract passes and they haven't performed, the title company has now satisfied their requirements to release that earnest money. It's rare for us that a seller backs out. We DO NOT in any way pressure seller's. One of the first things we say to them is that "We only want to buy if you want to sell" People are coming to us to solve their problem and they've decided well ahead of time that selling the home solves their issue. All we can do at that point is make it as easy as possible for them so that they can move on. Hope this helps and please feel free to ask additional questions. Always happy to help if I can.

Dustin Heiner · Answer

Hi @Alan Johnson!

Thanks for the mention!

One side note as a investor/buyer I'd like to mention.

Personally, I LOVE working with wholesalers. They do the hard work while investors like myself get the benefit of having a long term rental. I've bought many properties from wholesalers and will continue to do so. Also, I absolutely do not mind paying the wholesaler fee. They did all the hard work so they should make money on it.

As a wholesaler, a non-refundable deposit sounds like a reasonable thing to charge. I get it. They want to make sure they are not wasting their time or lose the property. Plenty of buyers would probably pay it.

As an investor though, I never pay the non-refundable deposit. Maybe other investors do pay the deposit, but I don't.

Even thought I don't pay it, wholesalers still sell properties to me. Why? Because I am a buyer. If the property is good, they know I will go through with the purchase. If, after my inspections are done, and the property is not what it appeared to be I will need to adjust my price.

Let's say that after the inspection, there is $10,000 worth or work done that was not considered at the time of the contract. I don't want to be stuck with the $10,000 bill, so I lower my offer by $10,000 so the seller pays for it. If the seller does not accept, then I give them the option to not take my counter offer.

If I paid the "non-refundable" deposit and the seller walks, then I am out the money. I'm not in the business of losing money so I don't buy it.

For me, there are too many properties out there and I just move on when a wholesaler will not negotiate away the "non-refundable" deposit.

Thanks again Alan!

Dustin

Justin Smits · Answer

Typically we get paid our assignment at closing and the earnest money put down by the buyer is held by the title company in case a seller backs out. It does happen occasionally. I'm also an end buyer at times and I would never pay the assignment fee directly to the wholesaler at the time of signing a contract rather than at the closing. .

Joseph Hernandez · Answer

@Tom Gimer. Regarding investor paying 2 assignment fees, is the investor EMD's refundable if the seller can't close?

Alan Johnson · Answer

@Brian Jordan @Dustin Heiner Interesting contrast in your approaches; however, it is obvious to me that you each have solid, well thought-out business models. Thanks for the insight!

Alan Johnson · Answer

@Brian Jordan Thanks. There seem to be a lot of moving parts that the wholesaler has to orchestrate once the P&S has been assigned. You need to have both the seller and the assignee at closing. So I assume:

• You mentioned that the $2,000 deposit is non-refundable. However, in the (unlikely) event that the seller does not close, do you return the $2,000 to the assignee? (Presumably, the answer is 'yes', otherwise why hold the deposit in escrow?)
• If the assignee fails to close, you get the $2,000. But in this case, what do you do about the contract you have in place with the seller? Do you proceed with closing and purchase the property yourself?

Thanks,

Alan

Alan Johnson · Answer

@Tom Gimer @Justin Smits Thanks so much for taking the time to answer my question. My $10k example was admittedly unrealistic.

However, by way of further background, @Dustin Heiner wrote an excellent article on this topic on his website masterpassiveincome.com titled "What to Do When A Buyer Backs Out From An Assignment Of Contract".

In it he suggests a scenario where the assignee decides not to proceed, perhaps after discovering a big ticket repair item that would cost significantly more than the portion of the assignment fee held in escrow. So it's possible that the assignee might decide to cut his losses and forfeit the fee amount he already paid in.

Regardless of why this might happen (which is really immaterial), the questions I should have asked are:

• How frequently (percentage of a wholesaler's deals) does it happen that a buyer backs out of the assignment, and
• When it does, how successful are you in pursuing the alternatives mentioned in Dustin Heiner's article?

When Are Assignment Fees Paid?

When Are Assignment Fees Paid?

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