Understanding an Assignment
An assignment, in terms of real estate, is very different from its more commonly understood meaning, which is a task given to a person. So what is an assignment then? You have come to the right place to find that out.
There are two parties involved in an assignment: the assignor and the assignee. An assignment of contract is said to take place when the first party to a contract (the assignor in this case) signs over their responsibilities and rights in the contract to a third party, which is the assignee. The one who receives the assignment (the assignee) basically takes on the assignor’s responsibilities, and it becomes their duty to fulfill the terms of the contract from there on out.
To put it in simple words, an assignment of contract is essentially a means to profit from a real estate transaction without becoming the property’s actual owner. Buying and selling is a part of the exercise, but you are just the mediator. An assignment is a very valuable tool in every real estate wholesaler’s toolkit. It also makes it much easier for a real estate investor to enter into the business since there is no need to spend a lot of money from your own pocket in order to profit from a deal.
How Do You Assign a Contract?
It is a pretty common strategy in real estate wholesaling to enter into a contract assignment. The seller (the first party) and the wholesaler (the middleman) basically sign a contract that gives the wholesaler the complete right to buy a property at a specific price. Still, it can only happen in a specified period of time.
The next step is to find another buyer for the property and assign the contract to them. Keep this in mind that throughout the process, the wholesaler never sells the property to the end buyer because they never owned it in the first place. What the wholesaler is doing is just selling the contract, and that gives the end buyer the option (and the right) to buy the property according to the original terms of purchase.
The wholesaler can thus charge a fee for arranging the deal between the original owner and the new buyer, and that is how you can profit from a contract assignment.
How does it Work?
Assigning a contract is not a very simple process, but don’t fret. We’re going to make it very easy for you to understand. Here are a few steps that’ll tell you how contract assignment works.
Finding the Right Real Estate
This right here is the trickiest part of the process. You usually need to employ several different marketing strategies to find good leads and identify a property that would work for you as an investor. For this to work, a wholesaler needs to find a willing and motivated seller who wants to sell the property as quickly as possible. The wholesaler can capitalize on this sense of urgency and basically find the right buyer and negotiate a reasonable price, which will, in turn, cover the wholesaler’s assignment fee. It’s usually the best practice to be up to date about market trends.
Getting the Agreement Signed
As soon as the seller agrees to sell their property at a fair price, a purchase agreement will be signed among the seller and the wholesaler. The said agreement needs to contain language that clearly communicates the terms and conditions and basically allows the buyer to assign their rights in agreement to a third party. Be advised that often the purchase agreement does not contain this language. You need to be very careful about this. Therefore, the first course of action is to make sure clear language is included that explains all the applied conditions if the wholesaler plans to sell or assign the contract to someone. Get a lawyer to help you phrase the purchase agreement properly such that everything is explained correctly.
Communication is Key!
We can’t stress enough how important communication is between the wholesaler and the seller. The seller’s intent should be clearly communicated. If the seller isn’t completely aware of the assignment process, the buyer has to make sure they explain the entire process to them. The seller needs to be fully aware of this, preferably before the time they sign the original purchase agreement. This is a fundamental requirement of every assignment contract.
Finding a Buyer
The wholesaler’s first job is to find the right property, communicate with the seller about what they want, and get the agreement signed. Their second job is to find a willing buyer. Knowing the market status and the latest market trends would serve as your best ally here. Once the wholesaler finds a buyer for the property, all there’s left to do is to assign the contract to the new party and schedule a closing date for the deal. The wholesaler needs to keep both the original seller and the new buyer in the loop.
The assignment agreement is a contract through which the wholesaler lets the new buyer step into his/her shoes as the buyer in the original contract. What this document does is basically replace the wholesaler with the new buyer; however, the wholesaler only gets paid once the deal is closed.
It is VERY important for an assignment contract to include a segment written in the appropriate language that communicates a nonrefundable deposit from the end buyer. Let’s say if the buyer changes their mind, this will protect the wholesaler. You can download assignment contract templates from the internet, but we strongly recommend that you consult a lawyer and have them review the agreement prior to making a deal. The contract’s wordings need to be accurate and entirely in accordance with the laws of your city/country. Thus having a lawyer on board protects you from any trouble that might come along down the road.
Closing the Deal and Collecting Your Fee
This is the final stage of the process. The wholesaler needs to keep this in mind that they only get paid once the deal is finalized and closed. The assignment fee can either be a specific agreed-upon amount, a percentage cut of the property’s selling price, or the difference between the original price of the property and the discounted price at which the property is now being sold.
This whole process is transparent, and the end buyer can see just how much money the wholesaler is making from the deal as the buyer has to sign the closing statement. This statement contains the assignment fee and the purchase price from the original seller. The assignment agreement is already clear about this part. If the assignment fee is a fair amount relative to the purchase price of the property, most buyers and investors are not going to cause any problems. However, if it is an unjustifiably large sum, then the end buyer may be annoyed, and things might go downhill.
Benefits and Drawbacks of Assigning Contracts
Like we’ve already told you, assignment contracts are a way to allow many budding real estate investors to get into the business mostly because they don’t need to use their own money to buy a property; therefore, they aren’t taking any serious risk when arranging a deal.
The wholesaler never owns the property, to begin with, and is thus not a part of the title chain. This saves him/her from going through the trouble of closing twice. Assignment contracts are normally not very costly for a wholesaler, and they don’t require an insane amount of paperwork.
On the other hand, there are some drawbacks to the process that every wholesaler needs to understand. The first of which is that the wholesaler is supposed to sell the property as it is since they don’t own it. That means you cannot make any repairs or get any renovations done to it in order for the property to appear more appealing to the potential buyer. Sometimes financing is a difficult affair for the end buyer because many mortgage lenders aren’t willing to work with assigned contracts. This can make the idea of buying a property through an assigned contract less attractive. In addition to that, purchase agreements always have expiration dates. That means the wholesaler doesn’t have indefinite time to find a willing buyer and close the deal. It’s a lot of added pressure if you come to think of it.
If you want success out of this whole process, you need to be able to communicate efficiently and also be excellent at marketing. It is all about finding the right way to pitch a certain property to a buyer, and you can learn and develop many different strategies to get by. Also, having a vast network of potential investors can help you find someone willing to buy a given property quicker than usual.
Though we admit that assigning contracts can sometimes be a tricky process and complications may arise, we hope that with all the tips that we’ve provided, you’ll leave this website more informed and confident. Best of luck!