Deal with Assignment Clause

[Naaman Newbold]

We're looking at a deal with an assignment clause and it's the first time we've dealt with this clause. Overall the deal looks good, but our broker won't do a deal with an assignment clause because it raises "red flags". After talking through it with our broker, the red flags are really a measure left over from the 2008 bubble that prevent flippers from speculating on properties. The way I understand it, the wholesaler is arbitraging the market by getting into contract at a below market price, selling it for market value, use the mortgage company to cover the cost of acquisition and close simultaneously with us. According to our analysis, the price we're paying is still about 10% below market value. So, we can start looking for a bank that can get the deal financed, but it's unclear to me if there's some hidden concern over an assignment clause that we should model. I really appreciate your help. Thanks, Naaman

[Kyle J.]

If I understand your post correctly, it sounds like you are considering purchasing a property that a wholesaler has under contract where the wholesaler will simply assign his purchase contract with the seller to you for an assignment fee and you'll be using bank financing for the purchase.

If that's the case, one thing to be aware of - since you plan to use bank financing - is that banks will typically use the lower of the purchase price OR the appraised value to calculate the LTV that they will lend on.

So, to give you an example using rough numbers, let's say that the wholesaler gets the house under contract for $160k, and then adds a $20k assignment fee on top of that and assigns it to you for the total price $180k. According to your research, the house has a market value of $200k so you think it's a deal because you're getting it for 10% under the market value.  

That may be true; however, when you go to get your loan the bank will likely only finance based on the $160k purchase price.  Some people hope that the bank will use the $180k purchase price (or even the $200k it may be worth) and think that they should because the house is actually worth $200k.  But remember, the banks will use the lower of the purchase price OR the appraised value.  And in this example the purchase price is actually only $160k (they won't include the $20k assignment fee because that's just a fee tacked on to the purchase price).  So you'll have to come out of pocket for the assignment fee. 

Doesn't mean you can't get a good deal buying from a wholesaler.  You just have to know that you may have to bring some extra money to the table.  You don't want to find that out too late, especially if you don't have the extra money to put down or your just don't want to put that much down.