In layman’s terms, the assignment fee is the fee paid by the end buyer to the real estate wholesaler. This fee is for the wholesaler’s professional service of finding a property. The wholesaler then transfers completion of the intended purchase to the end buyer as outlined in the contractual obligation.
It doesn’t take much research to notice trends in real estate. According to the Bureau of Labor Statistics (BLS), workers in wholesale sectors will continue to be in demand as these occupations remain critical.
Regardless of where the economy heads, how much more will real estate wholesalers need to be at the top of their game?
To help fortify your foundation, in this article you’ll gain greater awareness of:
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Assignment Fee: The amount of money an end buyer agrees to pay a real estate wholesaler in exchange for the rights to purchase a particular piece of real estate. In simple terms, a real estate assignment fee is the price paid to a wholesaler who serves as an intermediary by arranging the sale of property between the original seller and the end buyer.
The assignor is commonly referred to as the middleman or contract flipper, as they are selling their right to buy the property in exchange for the assignment fee paid by the end buyer. Flipping real estate contracts is different than traditional house flipping, as the wholesaler’s contract flipping is usually a much shorter-term process that is typically resolved in less than 30 days.
To understand the assignment fee, it’s important to have familiarity with the basic legal terminology of what a real estate assignment entails. As mentioned above, in real estate, assignment is the process where the assignor agrees to transfer property ownership, rights, or interest to the assignee.
In real estate wholesaling, the assignor attains rights to market the property, advertise the property through preferred marketing channels, and connect a prospective buyer with the original seller, usually a homeowner in need of a quick sale.
Hence, the wholesaler earns the assignment fee from the assignee.
Consider the winning financial investing strategy of buying low and selling high. The best real estate wholesalers understand this. They know if they want to be successful, there’s a fine art of blending necessary sales, marketing, and real estate investing skills with required people skills needed for negotiating deals that are not always cut and dry.
The beauty of assignment fees is this: There is no one size fits all.
Some real estate wholesalers start with a standard fee as low as $5,000, while others collect 5% of the original purchase price, and others earn assignment fees that are based on 15% of the final selling price.
While assignment fees should always consider mutually beneficial circumstances for all parties, the most important element is the wholesaler’s ability to negotiate based on their understanding of the variables involved in each deal.
For a starting point, real estate wholesalers should invest time in understanding how much each property may realistically cost before and after repairs and related expenses, including legal fees. This helps wholesalers contemplate earnings from real estate assignment fees.
Because the assignment fee equals the difference in what buyers will pay and the price negotiated for the original purchase, if you fail to negotiate your assignment fee, you will likely find yourself in a tight spot.
Wholesale real estate should focus on creating “win-win” situations for you and the seller. This involves considering the cost of purchase, After Repair Value (ARV), and the Maximum Allowable Offer (MAO).
Because this is a fee paid to the wholesaler, in most cases the sale will be structured so the end buyer, the assignee, assumes responsibility for paying the assignment fee.
While there are some exceptions, this is typically the case. It’s important to never make assumptions about who, what, when, where, how, etc. the investor will pay, and the seller will be paid.
Ensure wholesaling contracts specifically spell out all provisions, including a clause allowing for assignments, specific forms, criteria, restrictions, etc. Having your lawyer review anything that’s legally binding will protect you and your assets from devastating consequences if the assignment of contract is not done properly.
While real estate wholesaling can be lucrative, it certainly requires dedication to a certain amount of effort.
Discovering attractive deals, both on and off-market, and pitching them as “win-win” scenarios to end buyers isn’t easy. Many wholesalers spend countless hours researching properties, finding potential sellers, and linking them with the right end buyers.
Your job is finished when you’ve ensured the right real estate investor will gladly pay your assignment fee because they trust you and understand what a great deal they are getting on their newly acquired real estate.
It’s important to have familiarity with potential buyers as they are not all the same. Some are real estate investors interested in flipping real estate while others are interested in having the passive income available through long-term rental properties.
While the assignment fee will depend on several variables, including the price of the property sold, it’s common to see assignment fees between $10,000-$20,000. We’re happy to report students who’ve earned assignment fees between $100k and $500k!
It’s fair to say the sky’s the limit on what you may earn in your wholesaling journey.
Consider some of the variables that may increase the assignment fee a wholesaler can earn.
When a property needs major repairs, there’s been a traumatic event on the property, the seller is in a desperate financial state, etc., opportunities increase for wholesalers to earn larger assignment fees.
This is where the soft skills of connecting with people intersect with the hard skills of negotiation.
“There is a lot of money to be made in wholesale real estate, if you know the game well enough. There is no real average on an assignment fee per transaction.” Ethan Taub, FinTech CEO.
Particularly when looking to wholesale properties outside your state of residence, it’s always wise to familiarize yourself with state laws that may impact your ability to earn assignment fees. A state, such as Illinois, may limit the number of contract assignments that a wholesaler may conduct in a calendar year before requiring a real estate license.
In some instances, wholesalers may be required to perform a double closing to honor the laws of the land. Outside these boundaries, negotiating parties are essentially limitless in terms of the financial incentive they arrive upon for their assignment fee.
Still, protect all parties by clearly spelling out the amount and terms of payment in your assignment agreement. This is one path to assuring there are no surprises for you, the end buyer, the seller, or the title company at closing.
For new wholesalers, a crucial factor for consideration is knowing your break-even point.
When wholesalers are focused on securing deals at the lowest possible price, gaining the greatest assignment fee, and selling at the highest price that works for the end buyer, they have a recipe for success.
Inexperienced wholesalers can make a lot of rookie mistakes like not knowing that HUD properties (property obtained by the Department of Housing and Urban Development), real estate owned (REOs or foreclosed-upon property), or listed properties are not always assignable.
When considering REOs that are not always assignable through traditional methods, it’s important to do your homework and understand advanced strategies that may make these opportunities possible.
Too often, newbies see their financial rewards and get greedy by not doing their homework on REOs or pricing their offers close to retail. Not only do these terms raise red flags for potential buyers, but they also create additional risks like forced price reductions or not closing the sale at all.
Talk with twenty real estate investors and you’ll likely receive twenty different answers on what they’ve experienced. As with other properties, there is not a “typical” assignment fee when negotiating on the sale of a vacant lot.
Depending on local market conditions, the size of the lot, location of the property, anticipated sale price after any improvements, and other factors typical to real estate transactions, it’s easy to see how the assignment fee can vary. Common to any wholesale transaction, these variables are not limited to the sale of an undeveloped piece of real estate.
As a wholesaler, funds are received when the end buyer submits payment for the sale. This puts the responsibility on the wholesaler to perform due diligence in researching variables before agreeing upon the value of every lot you are interested in wholesaling.
When understanding the difference between the current and future state of the property, visionary wholesalers are one step ahead of their competition in terms of pricing appropriately.
Too many wholesalers agree they’ve missed out on potential rewards by not doing their homework and understanding crucial variables that can make a property more valuable than meets the eye.
Regardless of what type of property it is, the profit earned in your assignment fee has more to do with your ability to research, market, and negotiate than the actual value of the property.
Trust the adage that the property will only be worth what someone is willing to pay for it.
If you agreed to purchase a lot from the seller at $129,000 and you assign the original contract to the buyer for $229,000, your profit (assignment fee) of $100,000 is money well-earned that rests squarely on your shoulders. But, if you weren’t diligent in your research and didn’t know the history of the property or the seller’s reason for wanting to bail, that sale may never happen.
In most cases, any type of loan fee expenses will appear on the HUD-1. These can include document preparation fees, application fees, draw fees, wire fees, and assignment fees.
Depending on how a deal is structured, local laws, etc. the assignment fee typically appears on the settlement statement, the HUD-1. In many cases, this helps wholesalers establish trust through transparency.
At the same time, it may elevate cause for concern when a seller questions the amount a wholesaler can make off their deal. This may be another reason to consider a double closing.
One possible location for the assignment fee in Section 200 where the HUD-1 includes transactions paid out of closing as credits to the buyer.
This section includes “Amounts Paid By Or In Behalf Of Borrower” like earnest money deposits by the Buyer, tax and assessment pro-rations from the Seller, the loan(s) amounts you are getting, the loan you may be assuming, Seller paid closing costs, credits to the Buyer for funds deposited from sellers or other sources.
Because any money owed to the Buyer by the Seller at the time of closing may show up here, this is another place the assignment fee may appear.
The assignment fee could also appear in Section 1300, “Additional Settlement Charges,” with fees that do not specifically belong in the aforementioned sections. Fees collected by the settlement agent at the title company will be disbursed at the time of closing and may include the disbursement of expenses due from the Buyer.
Because the IRS is the expert at tracking methods for accounting income and expenses, including real estate transactions, be sure to check with your tax advisor so you are fully aware of liability and reporting requirements.
Whether on the HUD-1 or elsewhere, failure to disclose amounts earned in wholesale real estate transactions can land a wholesaler in trouble with the IRS and other entities for numerous types of fraud, so be wise in your reporting.
Because nobody wants to find themselves too close to the IRS, it’s always wise to assume that regardless of how it was earned, income is taxable. As with most things in life, taxability will depend on several factors, including corporate structure, individual tax strategy, etc.
A general rule to keep you on the right side of the IRS? Confirm the latest updates on reporting income through www.irs.gov.
“Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options,” according to the IRS.
Of course, there are always nuances when it comes to taxes, so in addition to familiarizing yourself with the IRS website, be sure to consult your tax advisor for specifics related to your circumstances.
In most cases, anyone can act as a wholesaler when they are willing to find a property and connect all involved parties. This includes real estate agents.
Usually priced below market value and in need of repairs, the best wholesale deals consist of contacting prospective sellers to arrange wholesale agreements that detail how you will find a buyer for the seller’s property at an agreed-upon price so you can collect your designated assignment fee.
Licensed Realtors acting as buyers have an advantage in their ability to access the Multiple Listing Service (MLS), run comparable sales, gain familiarity with market conditions, obtain lists of recent cash transactions in the area, and understand how to estimate repair or rehab costs effectively. In any case, it’s important for all wholesalers to know your “go-to” experts for pricing and consider all related expenses, including legal fees.
Regardless of the background of the wholesaler, overpricing properties or not fully underestimating rehab costs may hurt in the long run when the property doesn’t sell.
As mentioned before, the terms of how the investor will be paid should be detailed in the original contract. Various types of assignment contacts include the wholesaler’s assignment fee as part of the agreement.
Something as simple as an addendum, a consulting agreement, or an assignment contract may outline specific contractual terms.
Every assignment of contract should describe the obligation between the original seller and the wholesaler. It should outline the terms by which you agree to sell your interest to an end buyer for a specifically detailed assignment fee that the end buyer agrees to pay.
Assignment of Real Estate Purchase and Sale Agreement is negotiable, as is the potential to earn a substantial assignment fee at closing.
Below you can find the best practices for the Assignment of Real Estate Contracts.
Usually, wholesalers receive a deposit upon signing the contract for the Assignment of Real Estate Purchase and Sale Agreement. Inside, the agreed-upon terms will be detailed to describe how the assignor relinquishes their rights, responsibilities, and obligations to the assignee at closing when the remaining portion of their previously negotiated assignment fee is paid.
Here is an example of a real estate assignment contract form sample:
To help ensure you’re on the right track, download our FREE assignment of contract template and other great tools like our sample purchase agreement. Keep these around for all your upcoming real estate deals.
Many investors dream of launching a career in wholesale real estate. Some believe they can hop on the bandwagon and do it in their spare time, on a whim.
It’s important to fully understand how an assignment is a legal process where an individual in possession of the property (the assignor) transfers rights, property, or other benefits to another identified third party (the assignee). When it comes to an assignment of contract in real estate wholesaling, the assignment fee comes into play with a property that is currently under contract but hasn’t yet been purchased.
As a wholesaler finds a property and enters into a sales agreement for the end buyer to purchase the property, the original contract is assigned to the new end buyer. When all goes according to the plan, the assignor collects the assignment fee after finding someone to carry out the terms of the assignment of contract.
Those with the most successful real estate wholesaling businesses are laser-focused on creating mutually agreeable solutions to sellers, end buyers, and themselves.
As you learned, the best wholesalers balance people skills with sales, marketing, and real estate investing strengths to solve problems for both sellers and end buyers. Ultimately, everyone wins.
Do you have what it takes? We’d love to hear your stories about the best assignment fees you’ve received!
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