An assignment of contract is when one party (the “assignor”) has a contract to which they have certain obligations, and transfers those contractual rights to another party (known as the “assignee”).
In real estate, assigning contracts is an effective strategy to achieve an extremely high return on investment (ROI) for as little capital and risk as possible.
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An assignment of contract in real estate is when the original party who has a piece of real estate transfers their contractual obligations to that of a new party.
Assigning real estate contracts is a common way to “flip” real estate without having to come out of your pocket with any capital. Utilizing a real estate assignment contract to profit is also known as wholesaling, flipping contracts, selling contracts, and real estate day trading.
The assignment of contract is one of the easiest exit strategies in all of real estate investing. With this being said, there are a number of steps to ensure a profitable and efficient contract assignment for your learning. Below are 6 simple steps on how to assign a real estate contract:
Yes, it is legal to assign real estate contracts. However, there are situations when assignments will not be enforced, such as:
Solution: Get written consent from all parties.
Solution: Modify the contract with the permission of all involved parties. If the parties involved are okay with it, then you can modify the contract from being non-assignable to assignable.
Solution: Close on the property and sell it after the restriction is over. Back out of the property if you have the appropriate contingencies.
All in all, it is legal to assign real estate contracts. In fact, all contracts are assignable by default, unless specifically stated otherwise within the agreement.
As with anything having to do with contracts, it is extremely important to read the contract you will be signing with any seller of a property.
It’s recommended you use a real estate attorney to review the agreement you plan on using for your real estate deals to make sure it is worded correctly.
The biggest reason to use a real estate assignment contract is: you can profit from a piece of real estate by solely transferring your contract rights.
This process is called “wholesaling,” and is a great way to flip real estate while lowering your risk and using as little money as possible.
Many people see the house flipping shows where investors buy, fix, & sell houses. This entire process can take months, and even longer than a year to effectively renovate and resell a property.
Additionally, when you buy a property there is always risk that comes with it. Most real estate investors raise money and invest other people’s money into their real estate deals in order to work on multiple projects at one time. When a fix & flipper borrows this capital, there is usually an interest rate along with it.
What this means is, every day a fix & flipper has a house that they have bought and are renovating is another day that they will pay more interest on the money they’ve borrowed.
When a real estate assignment contract is used where the goal is to wholesale (“assignment of contract”) the property, then you virtually eliminate any risk. This is because you are assigning all contractual obligations to the new buyer of the property.
Real Estate Investors, such as fix & flippers, typically buy real estate contracts from wholesalers so they can have properties to renovate and resell.
Once you have a property under contract, then it is time to locate a buyer for the real estate contract. Make sure the first thing you do is ask for an earnest cash deposit to ensure that your earnest money will be paid upfront. This clause protects you from any breach of contract between you and the assignee.
An assignment fee (“wholesale fee”) is then agreed upon between you and the buyer. You will then need to execute an Assignment of Real Estate Purchase and Sale agreement between you and the buyer.
As the assignor you are assigning all of your duties and obligations that you agreed upon in the original purchase and sale agreement with the seller of the property. This means that the buyer must purchase the property at the original agreed upon price between you and the seller as stated in the original contract.
Just because the assignor of the contract is not the one purchasing the property that doesn’t mean there isn’t additional work to be completed to ensure the deal gets closed. Once a buyer is found to sell the contract to, it is time to make sure the buyer follows through and closes on the deal.
This makes it important to have a great title company or real estate attorney to handle the closing. Whether you use a title company or attorney is dependent upon which state you are in. Some states have title companies handle the closing, and some states have attorneys handle it.
Real estate wholesalers get paid when a successful assignment of contract takes place. Their terms of getting paid are to be stated in the Assignment of Real Estate Purchase and Sale Agreement.
Important: Everything is negotiable and no payment terms are set in stone unless agreed upon and signed in writing.
As a real estate wholesaler, you can get a deposit when the Assignment of Real Estate Purchase and Sale Agreement is signed. Then, when the transaction closes the wholesaler can receive the rest of the profit.
For example, if you are looking to get a $20,000 wholesale fee for a house, then you may take a 50% deposit of $10,000 when the contract is assigned. Then, receive the remaining 50% of $10,000 when the property closes.
A real estate assignment clause is a legally binding service that offers a contracting party the right to assign responsibility or transfer ownership to another contracting party of choice. Some contracts have a real estate contract assignment clause built into them. Below is an example:
“Assignment of Contract: The parties to this Contract mutually agree that it is binding upon them, their heirs, executors, administrators, personal representatives, successors and assigns. All parties agree that this Contract is assignable to any party for a profit.”
It is also a common practice for the original buyer of a contract to put “and/or assigns” next to their name. In addition to the real estate assignment clause, “and/or assigns” will make it even more clear that the contract may be assigned.
The real estate assignment contract is also known as the assignment of purchase and sale agreement. This is a separate legal document to the original contract.
The real estate assignment contract has the terms of the assignment, such as to who is the assignor/assignee, when the payment is taking place, and closing terms.
Here is an example of an assignment of a contract below:
Here's another example of a real estate assignment contract PDF by The Judicial Title Insurance Company.
Beginner investors always tend to wonder whether a seller will have an issue with an assignment of rights taking place. It depends on the seller and your correspondence with them. If you communicate clearly, then this is typically not an issue.
This is because the seller has signed a legal and binding contract making them obligated to fulfill the terms of the contract. You have every right to perform an assignment of contract when everything has been done legally.
The majority of sellers you encounter will not have an issue with the assignment and having another party close on the transaction. Sellers’ are usually most concerned that 2 things take place:
Communicate clearly with the seller and fulfill the contract obligations, and you shouldn’t have an issue with assigning a real estate contract.
Double closing can take place when the seller has an issue with the assignment of contract.
Double closing is when you close on the property (meaning you actually buy it), and then resell the property to the end buyer that you would have assigned the contract to originally.
The process of a double close is typically performed as soon as possible to reduce the risk to the wholesaler. If funds are needed to close on a property for this reason, then transactional funding is a great resource to use for any investor.
Transactional funding lenders lend real estate investors short term capital for double closing transactions.
Assignment contracts can be profitable and well structured, but with anything there can be some obstacles you may face when closing on a home. Always remember to research before doing anything and pick the best option for you in this process. Below we will unpack some pros and cons of assignment contracts:
In general, there are a lot of misconceptions about assigning real estate contracts and wholesaling real estate.
There’s a good chance you will encounter agents, brokers, attorneys, and others with little contract law or property law experience leading them to think that assigning real estate contracts is illegal.
Why would these real estate professionals think it’s illegal?
Because they are unfamiliar with the concept and think you are an unlicensed individual acting as an agent.
It’s important to understand that you are the principal buyer of the transaction and you are selling the equitable interest in the contract to another buyer. You are not selling the actual property itself for a commission like a real estate agent does.
It’s wise to be cognizant that you will most likely come across people who think that an assignment of contract is illegal. In these situations you’ll have to educate them on how real estate assignment contracts work.
This is another reason why you want to have a great real estate attorney on your team who can explain the legality of assigning and wholesaling to anyone you’re working with.
Utilizing an assignment of contract is a profitable real estate investment exit strategy. If you don’t want to buy, fix, and flip property, then you can always just wholesale it once it’s under contract by an assignment.
Assigning real estate contracts requires little to no capital, takes much less time to complete than other investment strategies, and is a great way to profit quickly from your deals.
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