Wholesale real estate investing inevitably becomes part of a real estate investors business if they buy properties directly from motivated sellers. This means the price they buy the properties at must be low enough to allow them to make a profit when they sell at wholesale prices.
Contract assignment means that you assign the right to buy the property from yourself to another buyer, usually a real estate investor.
In other words, you simply change the name of the buyer to the real estate investor for an assignment fee.
All the terms of the contract will remain when you assign the contract.
How does it work? Here are the steps of doing contract assignment:
1) Get the property under contract The first thing when you identify a good property is to put it under contract. The contract must explicitly state that it can be assigned to another buyer.
You can do this by putting "and or assigns", e.g. "My Company Name and or assigns".
Without this little clause you might be unable to assign the contract. It is important to let the seller know that you might assign the contract to another real estate investor.
I also tell them that I could partner with another real estate investor. They must understand that the contract and closing will not be changed, and that at the end of the day, you will make some profit out of it.
2) Get title work done This is usually done by a title company or closing attorney.
3) Get assignment contract signed You then sign a contract where you assign your right to buy the property to a real estate investor buyer.
You must collect earnest money when you sign the contract. This earnest money is paid to the title company. I like to make sure that they stand to lose the earnest money if they do not close the deal, but that the earnest money is will be credited to the sale at closing.
4) Close the deal The buyer then gets the transaction funded ready for closing. When it closes, you get a check for the assignment fee.
Advantages and disadvantages of contract assignment When assigning a contract, you eliminate the cost of doing two transactions with two closing costs.
The assignment fee stated in the contract is what you walk home with. You must show the assignment fee in the contract.
This is also included in the HUD1, meaning that all parties involved including the seller know the profit you make in the deal.
This means that some sellers or even buyers could develop cold feet when they think you are making a lot of money and back out of the deal. To eliminate this risk, I only do assignment of contract when I stand to make little money. If I stand to make 00 or more, I do simultaneous closing instead.
It is also impossible to assign some deals such as REOs and deals involving a Realtor. Such contracts usually specifically disallow contract assignment.
The biggest advantage is that even with little to no money, you can make a deal happen and walk away with a profit.