Using Real Estate Assignment Contracts for Investing
The assignment concept big picture:
Visualize a real estate purchase contract with just a few extra words added to your name as the buyer. This would look something like this: "Buyer: John J. Doe, and/or assigns." That's it. Seems simple, and it is. But, it opens up many opportunities for profits in real estate investing.
The "assigns" would be anyone that you want to pass your purchase rights along to.
You have effectively locked up a property with a purchase contract. You can now go ahead and buy it, flip it, rehab and rent it, or any other strategy that's legal. But, you can also pass it along to someone else for profit, never buying it yourself.
You're not just passing your purchase rights along. You're also passing along your obligations in the contract. This means that you are no longer involved in the transaction at all. You do not have to perform and buy the property, nor do you have any rights to make claims against the seller if there are problems with the deal moving forward. The person or company to whom you've assigned the deal is now responsible for taking the deal through to closing. As you probably won't be getting paid your fee or profit until closing, it can make you nervous waiting for the deal to close.
Profiting by simply referring it along:
The simplest way to profit in this situation is to simply locate one or more buyers in your buyer database, show them the value in the deal, and take a referral or "bird-dog" fee for bringing the deal to them.
You assign your rights to the deal, and they go forward to closing, paying you your fee after or at closing. You profit handsomely, though you only had whatever earnest money deposit to lock up the contract at risk. By knowing who your buyers are likely to be before you contract the property, that risk is very low if the value is there.
You build and maintain an active investor buyer list for your customer pool. This is crucial, as you really want to be pretty sure you have a ready buyer or two for a home before you commit earnest money. Doing a good job of building your list, you should be covered pretty well. This list will include both fix & flip and rental property investors with interests in buying depending on the condition of the property. Rental investors normally want a house ready for occupancy, or at least with only cosmetic or minor repairs necessary.
Back-to-back closings for a flip sale:
You can also take on the purchase, immediately selling the property to another investor or a retail buyer. You would probably take this approach because your profits would be higher. After the mortgage crisis in 2007 and after, you can no longer use the funds of one deal to close on another in simultaneous closings. The lenders just won't allow it. However, you can explore resources for short term funding, maybe a relative, your own cash, or a hard money lender. You only need the money long enough to close the purchase and then the sale. This can be hours, but never more than a day or two.
Assignment Deals are a Great Real Estate Investment Strategy:
What is your role here, and how are you adding value? Simply, you have perfected your techniques, and can locate really great deep discount real estate deals before others, your buyers, ever know about them. There are many ways to get to a good deal early, and your value to your buyer customer is that you've got the property in your control, so they'll only get it if you pass it along.
You have two tasks to hone to make this work well for you. First, have a really good buyer database, with information about what each is looking for. Second, you learn and put into play strategies to locate great property deals before they're general knowledge. If you get these two things in line and operating for you, using real estate assignment contracts can be your ticket to real estateinvesting profits with little of your own money at risk.
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.”
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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.
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.
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.
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!