Real Estate Assignment Contract: What Investors Need to Know

Find a property significantly below market value
Look for another buyer—normally a real estate investor—willing to pay a higher price
Assign the contract to the new buyer, who then purchases the property.

What’s the point of this practice? During a prime selling season, investors are super busy trying to lock down as many properties as possible. They’re looking to get their hands on almost anything that will generate a profit. Hunting for cheap houses occupies a ton of time – so instead, they turn to wholesalers. These investors focus on finding good deals, and leave the flipping, renting, and other elements to other pros. During a hot market, we recommend riding the storm and assigning as many r

The real estate world is filled with jargon. If you’re new to the field – and especially if you’re interested in wholesaling – here’s a term you need to know: assignment of contract. What exactly is it, how and when do you put it into practice, and what are the benefits? Let’s break down this important real estate term into its constituent parts.

What Is A Real Estate Assignment Contract?

Short and simple a real estate assignment contract is where you:

Find a property significantly below market value
Look for another buyer – normally a real estate investor – willing to pay a higher price
Assign the contract to the new buyer, who then purchases the property.

What’s the point of this practice? During a prime selling season, investors are super busy trying to lock down as many properties as possible. They’re looking to get their hands on almost anything that will generate a profit. Hunting for cheap houses occupies a ton of time – so instead, they turn to wholesalers. These investors focus on finding good deals and leave the flipping, renting, and other elements to other pros. During a hot market, we recommend riding the storm and assigning as many real estate deals as possible.

Is An Assignment Contract in Real Estate Legal?

Yes – assuming it’s allowed in the terms of your agreement with the seller.

In the past, investors would simply put “John Doe and/or assigns” as the purchaser under the contract. This worked up until 2008 when banks started objecting to this clause in contracts for real estate-owned (REO) properties. Your mileage may vary with individual homeowners. Investors have received quite a bashing, so this clause may make a seller uncomfortable.

One solution: Write up your agreement with a trust or LLC as the purchaser. By using an entity, you can assign it to another investor because the contractual rights are under the entity, not the individual.

When Will Assignment Contracts Not Be Enforced?

There are two main case scenarios when an assignment of contract will not be enforced. The first is when the real estate assignment contract is deemed to break local law. The second is when the phasing of the real estate assignment contract is incorrect, which will make it void. For these reasons, you should always seek legal advice before drawing up an assignment of contract. You’ll need to be familiar with any state and/or local by-laws that may make an assignment of contract unenforceable. You also need to make sure that the correct legal language is used.

Also, bear in mind that real estate assignment contracts cannot be done on all transactions. HUD homes, REOs, and listed properties have many barriers to this type of transaction. With many REO properties, the lender will ensure there is a seasoning period – normally 90 days – before you can resell the property.

Some real estate purchase contracts have a clause in them that explicitly does not allow assignment, so watch out for those.

How Does Assignment of Contract Work?

Let’s imagine this situation: you have the time to research and find promising real estate investment properties. You don’t have any intention (or desire) to buy these properties as long-term investments. You can still make money, however, by purchasing the contracts to buy these promising properties and then selling them to buyers who will pay the price stated in the contract (or higher).

That’s it: you’ve become an assignor. This is a common practice in real estate wholesaling, which is different from your typical long-term real estate investing. You won’t be dealing with the properties yourself: you actually won’t even be buying them at any point. You’ll just be buying the right to buy them and then collecting an assignment fee for finding the buyers to fulfill those contracts.

What Is An Assignment Fee In Real Estate?

The assignment fee is the fee an assignor gets for finding a buyer for a property. An assignment fee is also known as a wholesale fee.

Assignment Contract Vs Double Close

In an assignment of contract, the assignor never actually buys the property but merely sells the contract, or the right to buy the property to the end buyer. In a double-close scenario, the assignor buys the property and then immediately sells it to the end buyer.

Flipping Real Estate Contracts

Flipping real estate contracts is just another term for contract assignment. Yes, they are the same. If you are interested in wholesaling, then it’s useful to know that these two terms are used interchangeably.

Why Is An Assignment Contract in Real Estate Important?

Assigning contracts can be a great strategy for investors who want to save time – and, potentially, make good profits faster than by using other investing methods. Unlike a house flipper, a contract flipper doesn’t take years to renovate and resell properties. You are trading in buying rights not properties. Contract assignment can be an important way into real estate investing for those who lack the time and capital to devote themselves to traditional real estate investing.

The Advantages of Assignment Contracts in Real Estate

The relatively low-stakes nature of contract assignment makes it particularly attractive to beginner investors. If you get good at finding buyers, you can turn a good profit, too, with $5,000 per assignment contract considered standard.

Wholesaling can also benefit both real estate buyers and sellers as it tends to reduce the time to closing and closing costs. Some buyers may prefer an assignment of contract to going down the traditional real estate agent route as they’ll pay less in assignment fees than in agent fees.

The Disadvantages of Assignment Contracts in Real Estate?

The biggest disadvantage a contract flipper will face is overcoming people’s lack of knowledge about the contract assignment process. Some sellers tend to reject assignment contracts outright, and many buyers can have doubts, too. It is up to you, the assignor, to convince both parties that this process is beneficial to all parties.

Also, as an assignor, you will always face the risk of a buyer pulling out last minute, whether because they decide they don’t like the idea of paying the assignment fee or they don’t have the funds. Coupled with the fact that assignment contracts have limited time frames, you may find yourself in a situation where the deal falls through. You will need to get good at vetting potential buyers.

How To Make an Assignment Contract in a Real Estate Transaction

1. Find the right property – and a motivated seller

First, let’s understand what a motivated seller is. This is an individual who needs to sell a property quickly. There is usually some sort of distress going on in their lives, like a job transfer, or perhaps they’re burdened with inherited property. Keep in mind that a huge gap exists between wanting to sell and needing to sell. Knowing which category your seller falls into – helps you know how to handle the situation.

Need to sell: “I have to sell this house now because I’m moving to Maryland to take care of my ailing mother, and I have no other family members in the area.”
Want to sell: “I’m curious to see what my house is worth because I may be selling next year.”

There is a definitive reason behind the need-to-sell scenario. In the second one, there is mere curiosity.

There are numerous ways to find motivated sellers – and by extension, the right properties to assign – such as driving for dollars, newspaper ads, internet marketing, and direct mail marketing. If you begin to research real estate marketing, you will find many options – but make sure you use a combination of these strategies.

2. Acquire A Real Estate Contract Template

There are many assignment contract templates on the internet; however – at the very least – make sure an attorney has read and approved the document. There are two reasons this is so critical.

Comfort knowing your contract is legally sound
The ability to use that attorney as counsel in the event you find yourself in litigation.

There is critical verbiage that needs to be added to your assignment contract: “and/or assigns.” These three words authorize you to reassign the property to another interested buyer who is interested in the property. (Be sure to read your purchase agreement with the seller extremely carefully.) When you receive the signed contract, you now have an equitable interest in the property and have some legal standing in what happens.

If reassigning is indeed allowed, include a provision in your contract that clearly explains that you, as the buyer, are a real estate investor and that you intend to assign the contract to a new buyer. Have the seller initial the provision. This reduces the likelihood of a seller objecting to the new purchaser and attempting to back out of the agreement. Assure them that they will still receive the agreed-upon purchase amount.

3. Submit the contract to title

This process may differ in each state, but there is normally either a title company or a closing attorney that will conduct a title search. The title search will check the historical records of the property to make sure there are no liens on the property. It is important not to sell a property with a defective title. The title company or the closing attorney is an independent third party hired to make sure the deal is fair as agreed upon in the contract.

4. Assign the contract to the buyer

Yep: more marketing. Working to find your end-buyer, or assignee, can be daunting, but once you have a solid buyer, you can begin the process of closing the transaction.

When you find your buyer, ask for a nonrefundable earnest money deposit. Make sure your agreement contains language that specifically deals with earnest money – e.g., “The assignee will reimburse the assignor for the money paid upfront.” You do not want the assignee to breach the agreement, which would result in you losing your earnest money.

When the buyer deposits the earnest money, you then know they have a genuine interest in the property and are willing to move forward. This fee is normally held by the title company or the closing attorney.

5. Get the fee

You get paid when the end buyer wires the funds for the deal. This money will cover what you stated you were willing to buy the property for from the seller, as well as your fee for facilitating the transaction.

As an example, if you told the seller you would buy the house for $45,000 and you then sold your interest in the property to the buyer for $50,000, then your assignment fee is $5,000.

Note: Never refer to the assignment fee as a finder’s fee. These are two very different things.

How Do Real Estate Wholesalers Get Paid?

Real estate wholesalers, or assignors, get paid after the successful closure of an assignment contract. That is, you as a wholesaler get paid when the buyer closes on the deal and buys the property you assigned to them.

It is standard practice that assignments are done only for profits of $5,000 or less. But if you are comfortable with the seller and the buyer, it’s possible to assign a contract for a much higher fee. Be careful here: whatever assignment fee you and the buyer agree to needs to be clearly stated in the contract. Otherwise, you are not guaranteed to get paid.

Often, wholesalers can get paid a deposit ahead of the contract closing. This is good practice not only because you’ll get some of the money sooner but also because it helps weed out buyers who may choose to pull out later.

In the event you are not comfortable with all parties in the transaction, a double (or simultaneous) close keeps both legs of the transaction anonymous. Be aware: Not all title companies will agree to conduct a double close, so this needs to be discussed in advance.

But as you can see, there are some clear benefits to contract assignment for big paydays.

Investors: Have you ever assigned a contract? Any questions about this process?

Let me know your thoughts with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.