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Real Estate Assignment of Contract Explainedby Charles MburuguOct 12, 2020October 12, 2020
If you are thinking about purchasing real estate, there are several real estate investment strategies you could consider. This includes buying rental property, flipping houses, BRRRR investing, buy and hold, and real estate investment trusts (REITs). Another potentially lucrative strategy for making money in the real estate industry is wholesaling. This basically involves finding real estate deals that you dont actually plan to purchase, but plan to transfer to an end buyer. This kind of transaction uses a principle referred to as assignment of contract.
What Is an Assignment of Contract in Real Estate?
Assignment of contract takes place when one party to a contract (the assignor) transfers the legal obligations of the contract to another party. The recipient of the assignment (the assignee) then assumes responsibility for the terms of the contract. In other words, you can flip real estate contracts and make money from a real estate deal without actually owning the income property.
Is an Assignment of Contract Legal?
Yes, assignment of contract in real estate is legal. However, contract assignment will not be enforced in the following circumstances:
- There is no written consent Before a real estate assignment contract is enforced, all the parties involved must give written consent.
- The contract doesnt allow assignment Some contracts come with an anti-assignment clause which prohibits any assignments.
- The assignment violates public policy or the law Some jurisdictions have laws that prohibit or limit assignments.
- The property has restrictions Certain properties such as HUD homes, REOs, and short sales might have deed restrictions that prohibit the assignment of real estate contract within a specific time period.
How Does Assignment Work in Real Estate?
Here are the common steps for assigning a contract:
Find investment property for sale
The first thing you need to do is find a motivated seller who is willing to sell their home at a price that is below market value. The main difference between a motivated seller and a regular seller is the formers sense of urgency. Motivated sellers want to sell fast due to reasons such as divorce, living out-of-state, delinquent taxes, or job transfers. This sense of urgency could work to your advantage at the negotiation table.
You can use the following strategies to find homeowners that want to sell fast:
- Driving for dollars As the name suggests, this involves driving or walking around neighborhoods looking for signs of distressed properties. Signs of distress include overgrown grass, overfill of newspapers or mail, broken windows, deferred maintenance, and code enforcement signs. Write down the addresses of such homes and use them to locate the homeowner. You can visit Mashboard and find this info in minutes. Then, ask them if they are willing to sell and make an offer.
- Look for the countys delinquent tax list This list is a goldmine when it comes to finding motivated sellers in an area. Simply visit the county governments website or offices to get the delinquent tax list.
- Mashvisor Property Marketplace This is the best place to find cheap houses such as foreclosed homes, bank-owned homes, short sales, and auctioned homes. You can narrow down your search for off market properties using filters like location, budget, property type, miles, number of bathrooms, number of bedrooms, and desired cash on cash return. The inbuilt investment property calculator will help you estimate the rental income, occupancy rate, cash flow, cash on cash return, and cap rate.
Visit the Mashvisor Property Marketplace
Related: The Best Tool to Find Off Market Properties
Get the contract
You can easily download an assignment of contract template from the internet. However, it is advisable to have an attorney read and approve the document. This will assure you that the contract is legally sound and that you will have the support of the attorney in case you find yourself in litigation.
One crucial detail that needs to be included in the assignment of contract document is and/or assigns next to your name. It is this clause that authorizes you to transfer investment property to an interested buyer. Be sure to disclose this information to the seller, and explain the meaning of the clause if necessary. Give them assurance that they will still get the agreed-upon purchase amount.
Related: The Basics of a Wholesale Real Estate Contract and How to Prepare One
Submit the contract
Though the process of assignment of contract varies from state to state, you will generally be required to submit the contract to a closing attorney or title company for a title search. This search will look into the history of the home to ensure that there are no liens attached to the title.
Find an end-buyer
Finding buyers is an important step in the strategy of real estate assignment of contract.
You can find potential buyers using methods such as cold calling, posters and signs, newspaper ads, social media ads, Craigslist, or networking on real estate forums. Alternatively, you could solicit the help of a local real estate agent. Whatever strategies you choose, be sure to find a buyer before the contract expires. In fact, many investors who use this strategy work on putting together a buyers list before they even find a property for sale. Consider this approach as well.
Related: Heres How to Find Cash Buyers for Real Estate
Assign the contract
Once youve located an interested buyer, the first thing you need to do is ask for an earnest cash deposit. Your contract should clearly mention that earnest money will be paid upfront. This clause will protect you from any breach of contract. Since the earnest money is nonrefundable, you are assured of making a profit, whether the deal closes or not.
As the assignor, you will get paid once the end buyer submits the funds for the deal. The difference between the agreed-upon value and the price you reach with the buyer will be your profit. For instance, if you agreed with the seller that you would purchase the property for $170,000 and you then assigned the contract to the buyer for $230,000, your profit (assignment fee) will be $60,000.
Real estate assignment of contract takes less time to complete compared to other real estate investment strategiesand requires little or no capital. However, working with sellers and buyers that are not conversant with assignment of contract can be challenging. In addition, you might find a buyer that will want to back out at the last minute. If you want to flip a real estate contract, you should therefore anticipate such scenarios and prepare accordingly.Start Your Investment Property Search!START FREE TRIALStart Your Investment Property Search! START FREE TRIALWholesalingFacebookTwitterGoogle +Pinterest