Contract Assignment 101: The Beginner’s Guide to Wholesaling Real Estate

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If you’re new to real estate investing, there is a term called “contract assignment.” If you have not come across this term or you are unsure of the intricate parts of contract assignment, I am going to spell it out. If need be, re-read this article again and again. Also do not be afraid to ask questions in the comment section below.

We are in the prime selling season in most markets. During this time, investors are normally busy trying to lock down as many properties as possible. In our market, Phoenix, we are seeing an influx of buyers looking for deals. I recently had a conversation with a group of investors looking to get their hands on almost anything that will generate a profit. It would seem that we have not learned from the previous market crash how the real estate climate can change in an instance. My philosophy is ride the storm and assign as many real estate deals as possible.

If you have sat through any get-rich-quick guru pitches, the majority of them will introduce contract assignment wholesaling, but without giving you all the steps involved. Here is what they are referring to when they say “make $5,000 in the next 60-90 days.”

What is a Contract Assignment?

Short and simple. This is when you first find a property a seller is willing to sell significantly below market value. You then resell that property to another buyer, normally a real estate investor, at a higher price.

Can This Be Done?

Absolutely, I’ve done numerous transactions in Phoenix, although it is not as easy as it’s normally taught, however it is a proven real estate investment strategy with a very low barrier to entry.

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 How Exactly Does Contract Assignment Work?

1. Find a motivated seller.

First let’s begin with what a motivated seller is. This is an individual who NEEDS to sell a property normally very quickly. There is usually some sort of distress going on in their lives. There is a huge disparity between want to sell and need to sell. Knowing which category your seller falls into is the first step in identifying how to handle the situation.

If I want to sell, there is no since of urgency. There’s normally no timeframe in which to finalize the sale. However, “need to sell” sounds like this :”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.” This is a “need to sell” scenario.

Meanwhile, “want to sell” sounds a lot different: “I’m curious to see what my house is worth because I may be selling next year.” As you can see, there is a reason behind the need to sell versus the second scenario, where there is just curiosity.

There are numerous ways to find motivated sellers, such as driving for dollars, newspaper ads, internet marketing, direct mail marketing, etc. If you begin to research real estate marketing, you will find many forms, but make sure you use a combination of multiple strategies.

Related: Wholesalers Get a Bad Rap — But They’re Essential to Investors for These 3 Reasons

2. Get the contract.

There are many assignment contract templates on the web; however, I make sure an attorney at least has laid his/her eyes on it and approves the document. There are two reasons this is so critical. First, you will have comfort knowing your document is legally sound. Second, you will be able to utilize that attorney as counsel in the event you find yourself in litigation.

There is critical verbiage that need to be added to your assignment contract “and/or assigns.” Why is this so critical? This verbiage authorizes you to re-trade the property to another buyer who is interested in the property. When you receive the signed contract, you now have equitable interest in the property and have some legal standing in what happens to the property.

To provide clarity to the seller if asked about the “and/or assigns” clause, I inform them that we buy numerous houses, and we often have funding partners that we work with. These partners ensure we have more than one set of eyes to run the numbers.

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 a independent third party hired to make sure the deal is fair as agreed upon in the contract.

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4. Find your buyer and assign the contract assignment.

Here is another leg of marketing. Working to find your end buyer can be daunting, but once you have a solid buyer, you can begin the process of closing the transaction. First, when you find your buyer (via Craigslist ads, Zillow, email marketing etc.), you should require a nonrefundable earnest money deposit.

Having the buyer furnish an nonrefundable earnest money deposit secures your position in making a profit. This money will become yours whether the transaction closes or not. The earnest money can be as much or as little your require within reason. I’ve seen deposits of hundreds of dollars up to $5,000. When the buyer deposits the earnest money, you then know that your buyer has a real interest in the property and is willing to move forward. This fee is normally held by the title company or the closing attorney.

5. Get Paid!

This is what most of us want to hear. We get paid when the end buyer wires in the funds for the deal. This money will cover what you stated you were willing to buy the property from the seller for, 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.

Related: The Harsh Truth About Wholesaling Newbies Need to Know

It is important that everything is disclosed because I’ve seen transactions stall at the closing table due to the seller or the buyer does not agreeing with you as the assignor making money. Again, this is why you inform you seller specifically that you are going to make a profit; however, ensure them that they will still receive the amount agreed upon for the price.

Other Considerations

It is standard practice that assignments are done only on profits of $5,000 or below. 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 close or simultaneous close will keep 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 present many barriers when trying to perform 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.

As you can see, there are some clear benefits to contract assignment for big paid days.

Investors: Have you ever assigned a contract? Any questions about this process?

Let me know your thoughts with a comment!

About Author

Marcus Maloney G+ is the Executive Officer of 3rd Generation Management & Holding LLC, which is a family owned and operated real estate investment firm. The firm's goal is to provide affordable solutions in real estate while providing exceptional opportunities for community redevelopment for the residents of Phoenix, Arizona. You can follow Marcus on Twitter

32 Comments

    • Marcus Maloney

      Michael,

      Our approach is simple we inform them we are here to provide a solution for you as the seller however, we are a business and the transaction has to be advantageous for both parties. So our aim is to provide a solution for you which in turn is profitable for us as well. So as a result of this philosophy there isn’t a winner or a loser.

      This approach has always worked for us and most people view that as fair.

      “Enjoying the Journey”

      • People expect that real estate agents will make money on the transaction. In my community, the commission is typically 6%. If there are no agents involved, I do not see how the seller would object to paying a “commission” to find a buyer. It seems to me the main difference is that wholesalers must be prepared to sometimes buy the house themselves and look for a buyer later. Agents do not usually operate like this.

        • Katie, wholesalers do not “have” to buy the house this is the reason for the inspection period. We normally have a 14 business day inspection period. We inform the seller that if we forsee the property is not going to move, we can cancel the contract within that timeframe. This is all disclosed upfront so they are aware of this possibility. The great thing about it is that we only had to cancel one contract in my many years of buying houses.
          “Enjoying the Journey”

        • I did not say that wholesalers have to buy the house, however other BP wholesalers have said that wholesalers need to be prepared in case they do need to buy the house themselves in order to fulfill the contract to the seller. This situation never happens to an agent.

          Your 14-business-day inspection period is great. The typical agent-prepared sales contract generally allows a minimum of 17 CALENDAR days, very difficult when home inspectors and pest inspectors want to make their appointments two weeks out.

    • Marcus Maloney

      Chris,

      Thanks for reading; to answer your question the end buyer pays the closing cost. So when you market the property for a buyer you need to have a phrase “the price is net to the seller”, this informs the buyer that when the transaction is complete the price you marketed the property for is the amount that you and the seller walk away with.

      Example:

      123 E. Main St for sale 98k this price is net to the seller. “Buyer must conduct his/her own due diligence and the information provided is a matter of opinion”.

      This will cover you for most liability purpose for instance if the property is 1250 sqft and you marketed the property as 1289 sqft. This is not done intentional but mistakes do occur with the tax records or mls records.

      In our example you got the property under contract for 92k and you have a 6k assignment fee, so you and the seller will walk away with what you requested. All other fees are the buyers responsibility.

      I hope I didn’t complicate things. If you have any more questions just shoot.

      “Enjoying the Journey”

    • Lydia T.

      I would say yes it is possible, but it is probably not the best idea. Motivated sellers typically want quick closings and obtaining bank financing is not a quick process. If you cannot purchase the property yourself and then sell to your buyer that needs a loan, I would suggest that you find an investor that you can wholesale this deal to.

    • Marcus Maloney

      Pamela,

      This is possible like @Lydia stated and motivated sellers are looking for a fast transaction, however it is likely. There are many options for this but here’s a few:

      1) You can inform your buyer that you need to extend the close of escrow. You can get it extended to about the time the buyer will be able to be approved for the loan. Then close the transaction. I did a transaction that had a close of escrow date a year in the future. This will not work in many situations but if the seller is not in an extreme hurry this can be done.

      2) You can request your buyer to get a short term hard money loan and then refinance out once the VA loan is approved. I have numerous buyers use this strategy. This way you help the seller and the buyer and yourself.

      Hope this helps. “Enjoying the Journey”

  1. Ricardo Cortes

    Thank you for writing the article, i did the mistake of sprinting into my real estate career, thinking i can go to all REI events in my area and come out with something.

    I now know this is a marathon, i trying to keep a good pace by reading.

  2. Ayse K.

    What about seller is no urgency but called to sell about market price. What to say to seller that time. You know I give advertising saying “I buy houses” Should I say to seller no thanks I’m only interesting if you want to sell desperately. I’m curious about how manage other than urgency seller. In the meanwhile thanks for article.

    • Ayse,
      Great question, your marketing is great you do buy houses however not every house fits your buying criteria. We have a few options for your situation. First we are license Realtors so we can recommend listing the property for them so they can receive top dollar for their home. This is why I strongly recommend getting a license. Secondly if you’re not a Realtor you can refer the seller to a Realtor, this will help you build rapport with the Realtor and he/she will then refer clients to you that are motivated and have urgency. You help the seller and build your network.
      Hope this helps….Thanks again for reading.
      “Enjoying the Journey”

  3. Phil Scheiris

    Ive been having trouble understanding the escrow part of this transaction. I have little money to put down myself and thats why I want to in the first place do the assignment (to make some cash to do more deals). In my understanding when you sign the initial contract with the motivated seller, you also have to put down a deposit of some sort for escrow to them to show you are serious and then you find the buyer. Are there ways around this like in your contract putting escrow to be paid by end buyer or would that not get you a contract at all. This is my only dilemma in moving forward right now I have all other components in place.

    • Ok ways around earnest money….there is no strategic way around this. I’ve learned that in most cases if you do not mention EM you do not have to add it to the contract. You can have the EM as low as you can possibly can. Remember everything is negotiable and use that as a tool to negotiate with.

      I’ve made 20k with EM AS LOW AS 100 bucks, and I’ve done deals I had to put up a 1000 it depends upon how savvy your seller is.
      Let me know if you need clarity, I can help you out.
      “Enjoying the Journey”

      • Phil Scheiris

        Ya as a new investor and im sure many have the same issue, i have been hesitant on making any offers because i know that I don’t have alot to put into em. what would be your advice on moving forward. Just to call talk to them make my offer verbally just to see if were even on the same page, then if we are to write out a contract to assign and leave out and not mention EM and it’s possible to get a contract this way? Then if they do bring up the EM I can negotiate what I can afford and if they want more either just stop the negotiations or could i put in the addendum of the contract that the buyer I assign the contract to will put a EM deposit in my place? I know this might sound so simple haha but it’s the only thing stopping me from moving forward. Ive talked to buyers learned the numbers game and all else just this part is baffling me. Thank you for your patience and advice Marcus! (P.S. our sons name is also Markus.. with a K so funny how here you are helping us!)

    • Marcus Maloney

      Adam, the best way is to have buyers list of creditable buyers you can market the property to. So many gurus try and tell you its good to have thousands of buyers but you will find that you only need a handful that close deals consistently with you. If you do not have a buyers list, post the property on Craigslist….the first few deals I did were from CL buyers and that help build my buyers list. Also you can get a free account with postlets.com and post it there it will also post on zillow.com so you will have tons of eyes on it. Finally you can contact a wholesaler in your area and joint venture on the deal and get it sold. By doing the latter it will give you a resource and can possibly start out to become a mentor for you. The name of the game is leverage; leverage others talents, time, and resources, and don’t worry it is reciprocal you will be leverage for them at some point. Give it a try it works and if it don’t work this time keep trying it will eventually become gold for you. I am a witness to that.

      “Enjoying the Journey”

  4. Hi Marcus, this is great information. We are very interested in starting to wholesale properties but wondered if there were any online courses you would recommend to further our education.

  5. Tomas Sablon

    This article is great. Very good general outline of wholesaling. I don’t wholesale yet but from my readings it seems it depends more on the persons drive and hustle to really earn. Thanks so much for writing this article!

    • Marcus Maloney

      Tomas,

      Thanks for reading, you are exactly right the principles are simple but you have to be able to hold yourself accountable and push through adversity.

      When you’re ready to get started and have any questions please feel free to contact me. Again thanks for reading.

      “Enjoying the Journey”

    • Marcus Maloney

      Andrew,

      I’m glad you were able to get something from the post. I believe a lot there is a ton of good content in the comments as well.

      If you have any questions you know where to find me my friend. Good luck!

      “Enjoying the Journey”

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