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Demystifying Real Estate Assignment Contracts

Key Takeaways

  • Real estate assignment contracts operate between two parties: an “assignor” locking in a contract, and assigning that contract to an “assignee.”
  • These types of assignment contracts are generally used in a wholesale investing strategy, so it’s important to put language in that permits said exchange.
  • The profits derived from this type of assignment vary, though there are general benchmarks which govern most deals.

Even the most left-brained, technical real estate practitioners can find themselves overwhelmed by the legal forms that accompany this profession. There is a good chance real estate assignment contracts speak like a foreign language to new investors, too. It’s not uncommon to have questions regarding the issue. How do they operate? And, most importantly, how do I get paid when using them?

Real estate assignment contracts are legal documents in which the person who holds the existing contract, in this case a real estate wholesaler, assigns the contract to another party (usually for a fee).

In this article, we will break down the elements of real estate assignment contracts, or real estate wholesale contracts as they are sometimes called, and provide strategies for how these forms of real estate legal contracts can help you further your career and reach your financial goals.

The Scoop On Real Estate Assignment Contracts

Real estate legal contracts

1. What is a real estate assignment contract?

A contract assignment, by law, occurs when an “assignor” (the one who holds the existing contract) hands off the obligations of the contract to an “assignee.” The latter would then receive all the rights to the contract upon closing the deal.

In a real estate context, this is when an investor (you, the assignor) finds a property priced at a lower value, and “sells” said contract to another buyer (the assignee) at a higher price.

There are a couple of caveats to keep in mind when considering using sales contracts for real estate:

  • Contract prohibitions: Make sure the contract you have with the property seller does not have prohibitions for future assignments. This can create serious havoc down the road.
  • Property-specific prohibitions: HUD homes (property obtained by the Department of Housing and Urban Development), real estate owned or REOs (foreclosed-upon property), and listed properties are not open to assignment contracts. REO properties, for example, have a 90-day period before being allowed to be resold.

2. How do these types of real estate contracts work?

A wholesaling investment strategy that utilizes assignment contracts has many advantages, one of them being a low barrier-to-entry for investors. However, despite its inherent profitability, it is not as easy as some make it out to be. If you’re going to go this route, here are the steps for this type of investment:

Step 1: Finding the seller

You need to be able to prune your leads, whether from newspaper ads, online marketing, or direct mail marketing. Remember, you aren’t just looking for any seller: you need a motivated seller who will sell their property at a price that works with your investing strategy.

The difference between a regular seller and a motivated seller is the latter’s sense of urgency. A motivated seller wants their property sold, now. Pick a seller who wants to be rid of their property in the quickest time possible. It could be because they’re moving out of state or they want to buy another house in a different area ASAP. Or, they don’t want to live in that house anymore for personal reasons. The key is to know their motivation for selling, and determine if that intent is enough to sell immediately.

Step 2: Acquire a contract template

Real estate assignment contract templates are readily available online. Although it’s tempting to go the DIY route, it’s generally advisable to let a lawyer see it first. This way, you will have the comfort of knowing you are doing it right, and that you have counsel in case of any legal problems along the way.

One of the things proper wholesale real estate contracts add is the phrase “and/or assigns” next to your name. This is a clause that will give you the authority to sell the property, or assign the property, to another buyer.

You do need to disclose this to the seller, and explain the clause, if needed. Assure them that they will still get the amount you both agreed upon, but that it gives you deal flexibility down the road.

Step 3: Submit contract

Depending on your state’s laws, you need to submit your real estate assignment contract to a title company, or a closing attorney, for a title search. These are independent parties that look into the history of a property, seeing to it that there are no liens attached to the title. They then sign off on the validity of the contract.

Step 4: Assign contract to buyer

Finding your buyer, similar to finding a seller, also requires proper segmentation. Whether you found buyers via online marketing or real estate listings, make sure your contract includes language that covers earnest money to be paid up front. This grants you protection against possible breach of contract.

This also gives you assurance that you will profit, whether the transaction closes or not, as earnest money is non-refundable. How much it is depends on you, as long as it is properly justified.

Step 5: Get paid

Your profit from a deal of this kind comes from both your assignment fee, as well as the difference between the agreed-upon value and how much you sell it to the buyer.

If you and the seller decide you will buy the property for $75,000, and you sold it for $80,000 to the buyer, then you profit $5,000. The deal is closed once the buyer pays the full $80,000.

3. How much can I expect to get paid?

Plenty of investors ask how much their assignment fees should be. You need to strike a balance between profiting and selling yourself short.

The standard assignment fee is $5,000. However, every deal is different. Buyers differ on their needs; hence, their criteria for spending their money (e.g. rehabbing vs buy-and-hold buyers) also differ. Understand this, so you’ll be able to negotiate a fee that you’re happy with.

As with any negotiations, proper information is vital. Take the time to find out how much the property would realistically cost before and after repairs. Then, add your preferred assignment fee on top of it.

Sum of All Parts

As with any part of the real estate investing trade, no one, single aspect will lead to success. However, understanding how real estate assignment contracts work is a vital part of this business. When you comprehend the many layers of how contracts are assigned  and how wholesaling works from beginning-to-end — you’ll be a more informed, educated and successful investor.

Do you have a real estate contract question? Any part of the contract process got you confused? Let us know in the comments below.

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