(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)
What is a contract assignment?
A real estate contract assignment is a wholesale strategy used by real estate investors to facilitate the sale of a property between an owner and an end buyer.
Real estate contract assignment strategies involve the owner of a subject property signing a contract with an investor that gives them the rights to buy the offmarket home.
Once under contract, the investor has the exclusive rights to buy the property, but they are not penalized if they don't follow through.
When assigning a contract, investors typically target distressed, off-market properties owned by motivated sellers.
This post teaches you the nitty gritty details about real estate contract assignments otherwise known as flipping real estate contracts.
Let's get started by defining what a motivated seller is.
Note: To get free access to the best off-market properties in the world, just click here.
What are motivated sellers?
A motivated seller is someone who is motivated to sell their property as soon as possible, for whatever reason.
Motivated sellers' properties tend to sell for 10% - 30% below the market average and typically have very favorable terms. These might include no money down and 0% interest rates.
Finding a motivated seller is a real estate investors dream. When you do find one, you're able to capitalize on their desperation and put in a low-ball offer that will more than likely be accepted.
How does a contract assignment work?
An assignment contract is put together to facilitate the buying and re-selling process.
There are 3 people involved in the process of flipping real estate contracts.
Below is a step-by-step process of how real estate assignment contracts work:
Once the wholesaler finds a property, they sign a Purchase Agreement with the seller. The Purchase Agreement is a sub-agreement within the wholesale real estate contract.
The Wholesale Purchase Agreement states that the wholesaler can legally assign or sell the agreement to the buyer.
The wholesaler then finalizes an Assignment Agreement to legally transfer their ownership rights to the buyer.
Now, the buyer can purchase the property directly from the seller per the terms of the original Purchase Agreement.
When a wholesaler transfers ownership of the property to the new buyer, it eliminates the wholesaler’s legal liability and obligation towards the seller.
There are a couple of caveats to keep in mind when utilizing contract assignments:
Contract prohibitions: You want to make sure the assignment contract you have with the seller does not have prohibitions for future assignments. This can create big issues down the road and is something you want to keep an eye out for. Make sure the contract is drafted by a lawyer that specializes in real estate assignment contract law.
Property-specific prohibitions: HUD properties (property obtained by the Department of Housing and Urban Development), real estate owned or REOs (foreclosed-upon property), and listed properties on the MLS are not open to assignment contracts. REO properties, for example, have a 90-day period before being allowed to be resold.
Assignment contract template
When putting together an assignment contract, you want to make sure to include as much information as possible just in case of any potential issues.
Below is an assignment contract template containing all the information you'll need
Parties involved – The names of both buyer(s) and seller(s), including signatures from all parties listed on the title.
Description of real estate – The property’s address, legal description and property type.
Personal property included in the sale price – Anything not attached to the building or the land. In most cases, this will include home fixtures.
Purchase price and financing – The purchase price, deposits and financing terms.
Where deposits are held – Outlines the manner in which deposits are held.
Financing contingency – Outlines the financial terms or if paying by cash.
Conditions of premises – Highlights the physical condition of the property that will be presented to the buyer.
Inspection contingencies – If the property does not meet the standards of a buyer, as listed from the conditions of premises, this will allow for an inspection period to occur (typically 14 days), in which point the buyer can back out.
Statement regarding lead-based paint – Disclosure related to lead-based paint.
Occupancy, possession and closing date – Establishes a deadline for the closing date.
Deed type – Confirms the type of deed to be conveyed.
Marketable title – If the seller is unable to pass title or the buyer is unable to obtain title insurance, this option will reject the purchase and return the deposit.
Adjustments – This will vary by state, but typically includes modifications for taxes, water, sewage and other charges.
Buyer’s default clause – This outlines the rights of the seller if the buyer defaults on the agreed upon terms of the contract.
Seller’s default clause – This outlines the rights of the buyer if the seller defaults on the agreed upon terms of the contract.
Risk of loss and damage – Protects the buyer in case of damage to the property while under contract.
Addenda – Common disclosures and addenda of the contract.
How wholesalers make money
To assign real estate contracts successfully, you first need to understand the basics.
That starts with understanding how contract assignments (wholesalers) make money.
Contract assignment profit is the difference between what you pay for a property and what you then sell it for.
The goal is to find a seller that is willing to sell way below the fair market value and then resell to a buyer at a much higher price.
If it takes a wholesaler too long to find a buyer, they may end up paying out of pocket, as per the agreement terms.
A property wholesaler will sell to both fix-and-flip investors and long-term holders.
Let's walk through the differences of those two buyer personas below:
Selling to fix-and-flip investors
When wholesaling properties to fix & flip investors, wholesalers need to be aware of renovation and repair costs for the property. These costs are crucial for a fix-and-flip investor to know.
The first thing a fix-and-flip investor is going to look at is the after repair value or ARV, often starting with the 70% rule. A properties ARV tells them how much they'll be able to sell the property for after it's been renovated.
After repair value, or ARV, is the estimate of a property’s value after all repairs and upgrades are completed. It calculates the margin between a property's present day value, and the property's value once it's been renovated.
Selling to buy-and-hold investors
Selling to buy-and-hold investors is a completely different game.
Unlike fix-and-flip investors, buy-and-hold investors don't typically care about the ARV of a property. This is due to the fact that they're going to be holding the property for a while, not selling it right away.
To appeal to buy-and-hold buyers, a property wholesaler needs to be very familiar with the surrounding market demographics and population information.
Buy-and-hold investors will want to know the average rents in the area to determine cash flow, average occupancy rates, employment growth over the past few years, and much more.
These are all crucial factors to know when buy-and-hold investing, as most investors are looking to hold properties for at least 3+ years.
Pros of assigning real estate contracts
Earn quick profits - Assignment contracts are able to turn profits on a deal generally within 30 days or less. Most wholesalers have plenty of deals going on at once, and are able to close around 5-10 deals each month. That's pretty good for a middle-man. Once you gain the experience and ability to find motivated sellers as well as build up your buyers' list, just rinse and repeat.
No credit checks & little cash needed - Despite having bad credit, you are still able to wholesale properties because you're not actually purchasing the property. Instead, you are assigning the contract to another buyer. That buyer, not you, has to go through the credit checks and fund the purchase of the property.
Learn about the real estate market quickly - Although wholesaling might sound scary to real estate investing beginners, it's a great way to dive in and learn the nuances of investing in a very short period of time. Wholesaling combines many of the other types of real estate transactions you'd encounter throughout your investing career. This includes legal documentation, marketing, calculating ARV, negotiating, and plenty more.
Cons of assigning real estate contracts
Your income isn't guaranteed - If you're looking for a steady gig with a guaranteed paycheck every couple of weeks, then wholesaling is not for you. Just because you find a distressed property from a motivated seller, doesn't mean you'll be able to instantly find a buyer. Wholesalers, like real estate brokers, are constantly on their toes and working both hard to find the best deals.
It takes time to build a buyers list - One of the keys to being a successful wholesaler is to have a large, dependable buyers list. If you have no buyer, you have no deal. It's really that simple. You want to have potential buyers lined up before making an offer to a seller, as it reduces your risk of potentially not making a sale. Most successful wholesalers work with repeat buyers. This is because they know these buyers are serious because they've done deals with them in the past.
Finding distressed properties can be tough - Wholesalers learn very quickly that they need to go outside their local market to find distressed properties owned by motivated sellers. There aren't many automated ways to find motivated sellers with distressed properties. Because of this, most wholesalers will drive around and look for properties with newspapers and mail scattered in the driveway with overgrown bushes and an unkept lawn. This tells them that the owner doesn't care about the property, and will more than likely be motivated to sell. Most wholesalers will also do direct mail campaigns to property owners and post in wholesaling Facebook groups to attempt to find motivated sellers.
The most common misconceptions when it comes to assignment wholesaling contracts is that they're illegal.
The second most common misconception is that wholesaler investors is unlicensed and pretending to be a real estate agent.
These misconceptions couldn't be further from the truth.
First, there is nothing illegal about assignment contracts –– entire companies are built around wholesaling and flipping real estate assignment contracts.
Second, unlike a real estate agent, you don't have to be licensed to be a wholesaler.
This is the case because wholesalers are purchasing the property and then selling it to another buyer. They're not listing the property on the MLS for a commission, so they're not required to obtain a license.
Most people don't realize that a huge advantage of wholesaling is the fact that wholesalers don't have to divulge their strategy to both the seller and the buyer. Because of this, wholesalers will often acquire properties and flip them within 30 days for a massive profit.
Had the wholesaler been forced to tell a seller that their property could be sold for 50% more than they were about to pay for it, it's very doubtful the seller would have sold the property to them in the first place.
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