Assignment fees PLUS mark-up?

Question

I'm beginning my first wholesale deal, and I'm confused about the assignment fee. I have the seller, and we've agreed upon a price of $250k. I believe that the property is worth $270k ($20k mark-up), which is what I would be asking for from the buyer.

Now, regarding the assignment fee: is this amount in addition to my mark-up of $20k? For instance, if I ask for $270k, and my assignment fee is $5k, would that make my profit $25k ($275k total)? Or would the buyer need to know the agreed upon price between me and the seller, therefore, my assignment fee would be $20k, bringing total to $270k? Also, is an assignment fee required? Or can I just mark-up the property?

I haven't been able to find a clear answer on this, and any help would be greatly appreciated.

James Guillot · Answer

When you put a property under contract, you gain an "interest" in the property. This means that you gain a temporary right to the property. An assignment contract means that you are signing over your interest in that property (the contract you signed), to that person. When you do that, they have access to the contract because it is now THEIR contract. So they will see everything, including the assignment fee in the assignment contract. Investors know what that means and if it's a good deal and a fair fee, none of them will have an issue with it. Real estate is an open world. Trying to be secretive or misleading causes problems damn near EVERY time. There's no reason not to be up front. You should always announce the fact that you are assigning a contract, especially to the buyer. It's easier to tailor an offer if you know that an assignment fee is added onto other things that affect your lowest offer (mortgage, liens, etc...).

Contractor estimates will be close to the actual cost. With the exception of unexpected costs, their estimates will be based on experience, expertise, and up to date knowledge on material costs. If you want to refine it a bit more, you could find a general contractor and have them go through every single detail that subcontractors may not think they need to worry about because it's "not their lane". A general contractor will manage all the work, not just a specific category of work. They won't just do that out of the kindness of their heart. You will either have to pay them for their time and knowledge, or actually hire them for the rehab.

I want to point out that a lot of these details are things a wholesaler should know before jumping in. @Matt Devincenzo said it best. You should probably pause and study up on rehab, wholesaling, and contracts. Very few people at bp want to see you fail. I'm sure you see all the scrutiny that wholesaling gets, and it's because many wholesalers don't really understand what they're doing or how to properly execute. Wholesalers are a huge asset to investors when they know what they're doing, but going in with only a little knowledge is a quick way to put you and the investor in a sticky situation.

Wayne Brooks · Answer

@Austin Lowe Investors buying from wholesalers aren’t looking to pay market value...they’d want to pay less than your contract amount.

James Guillot · Answer

Your assignment fee is whatever you want it to be, but it would generally be included in that 20k. Adding a cherry on top of your ARV will make the property cost too much and you'll have a hard time selling.

Matt Devincenzo · Answer

You need a better understanding of the overall process and contract obligation etc here...there are a few fundamental issues in your understanding of what it is you're doing. I say that so you can take more time to research how the contracts work...it will serve you well over time.

'Assignment': You are not selling a property, you are selling your beneficial interest in the contract to buy the property. So your assignment fee 'IS' your profit, there is no markup because you aren't selling the property you're selling your contract for an assignment fee. You cannot charge for the property because you will never own it, the buyer is simply buying out your contract so they can have the property instead. Also your question of do they 'have the right' to know your contract price is also flawed. It's not a right vs no rights question, they can and will know because what you are selling them is your contract and all the terms conditions in it. The only way they could possibly hope to be able to close the transaction is if they are given the contract with the sale price etc included...otherwise how would they know what contract terms they've agreed to perform to?

'Double closing': Unlike an assignment you are physically going to own the property for a brief moment in time. There is no assignment fee, there is only the markup on the price of the property. So your profit will be whatever you actually sell the property for. Your buyer never sees your contract at all because they are actually under contract to buy the property from you and so their contract terms are all that matters.

In either of these scenarios there aren't two numbers (e.g. your 270K and then a separate 275K) there's only one. So decide what you are doing assigning vs. double closing and then contract for a sale at your desired fee/markup and that's it.  Hopefully that clear some of this up.

Austin Lowe · Answer

@Matt Devincenzo I appreciate your honesty and taking the time to clear that up for me. You answered my question to a T. I guess my brain is thinking more along the lines of a double close and that's why I was having a hard time grasping the assignment fee.

Austin Lowe · Answer

@James Guillot I agree with you. I don't consider myself a 'wholesaler,' it's more like an opportunity fell onto my lap and I'm trying to figure these things out before I move forward.. I'm definitely grateful for everyone's help and input on this thread.

Austin Lowe · Answer

@Wayne Brooks I miss-spoke. The ARV is $430k and the TRC is $33k. Based on my understanding of the 70% rule, $270k should be a fair asking price. Or am I wrong in my assessment?

James Guillot · Answer

What I understood from this is:

Purchase price - 250k

ARV - 430k

Rehab costs - 33k

Assignment fee - 20k (10% of equity)

Anything above that 250k that you sell it for is your assignment fee. If you're assigning the contract for 270k that's a 20k assignment fee. That is fair considering the sale is 180k less than the ARV, which would be a 10% fee based on the 200k difference between purchase price and ARV.

I'm not sure what you have done or how thorough you are, but if the repair costs are only a rough estimate and there's that much value after purchase, you should try to get a more detailed and accurate repair estimate. If you can give estimates from contractors and an accurate rehab budget, it will eliminate uncertainty from an investor purchase and sell faster. It will also help you tailor your assignment fee to a more accurate and appropriate number.

Dom Battezzato · Answer

Hey Austin,

Congratulations on your first wholesale deal!! Whats your plan for real estate investing?

Zach Wain · Answer

100% - "Assignment': You are not selling a property, you are selling your beneficial interest in the contract to buy the property. So your assignment fee 'IS' your profit,"  With an assignment for contract you never actually own the property.

Assignment fees PLUS mark-up?

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