Copyright © 2011 Lex Levinrad Distressed Real Estate Institute
Assigning a contract is a very useful tool for wholesalers that would like to assign their rights to a property for a small profit. An assignment of contract form is used to transfer beneficial interest in the property to the new buyers (assignee) from the existing buyer (assignor).
How Does the Assignment of Contract Work?
Assume your name is Jack Smith and you have signed a contract to purchase a property located at 123 Main St in Fort Lauderdale Florida. Your purchase price on your contract is $40,000 but you would like to make a quick $5,000 profit and sell this contract (or assign it) to another buyer. Let’s say that you are successful in locating a buyer for this property that is willing to purchase the property for $45,000 which is $5,000 more than what your purchase contract states.
You tell this buyer that you have a contract to purchase this property for $40,000 and you will assign all rights to purchase this property for a fee of $5,000 to him/her. This fee is called an assignment fee.
The buyer agrees to the assignment fee and you have a one page form called an assignment of beneficial interest form or assignment of contract form (use an attorney to draw up this form) which states that you are giving up all rights to purchase this property and assigning it to the new buyer in exchange for an assignment fee of $5,000.
What are the benefits of doing this? Well firstly you are essentially flipping a property without ever closing on it or really owning it which means that you do not have to come up with any cash or pay any closing costs or incur any liability or expense. You are not really flipping the property you are actually flipping the contract that gives you the right to purchase the property. This is what wholesalers do and it can be extremely lucrative.
The only money that you will actually need to put down will be the deposit that you give to the seller or put on the contract as a deposit held in escrow (escrow is preferred). A true wholesaler would never put more than $10 or $100 down in order to reduce their risk. What is the risk to the wholesaler? That they cannot find a buyer to purchase the house at a higher price and they will need to cancel the contract. When they do cancel the contract their deposit can be forfeited.
Purchase contracts have an inspection period which is the time period that the buyer is allowed to inspect the property. Regular buyers use this inspection period to bring in their general contractor or inspector to complete an inspection of the property. However wholesalers use this inspection period to try and market the property and find a buyer.
If the wholesaler cannot find a buyer for this property then they can simply cancel the contract within the inspection period and get their deposit back. If there is a problem or delay in getting the deposit returned (like the seller won’t give it back) or if the buyer has cancelled after the expiration of the inspection period then the deposit will not be returned and will be forfeited. It is for this reason that you should use the least amount possible when placing a deposit on a property that you plan on assigning. A deposit of $10 or $100 is the most you should use for deposit on an assignable contract.
There is one key point for you to keep in mind if you are going to be assigning a contract. You must use the words “and or assigns” after your name. This means that on the purchase contract the buyers name should be Jack Smith and or assigns not just Jack Smith. If you don’t use those words “and or assigns” then your contract will not be assignable. You should also check off the clause that says that the contract is assignable, which is a separate item that is further down in the purchase contract.
Another important point is that you will not be able to use the assignment method with bank owned properties and short sales. Banks do not want assignable contracts because they don’t want wholesalers tying up their bank owned properties and trying to flip them. If you are making an offer on an REO or short sale or any property where the bank is the seller then you will have to use the double closing method for these properties.
A disadvantage to the assignment of contract method is that your buyer will see how much profit you make so if your profit is really huge it could potentially create a problem with your buyer trying to reduce the purchase price. For example if you purchased the property for $15,000 and tried to sell it for $45,000 with a $30,000 assignment fee then you might encounter a lot of resistance from the buyer who thinks you are marking up the property excessively. This could be avoided by using the double closing method where the buyer does not see how much you paid until after the transaction has closed (public records).
I find that it is often preferable to double close on all transactions regardless of who the seller is and I use as low a deposit as possible depending on whether the seller is a private party or a bank (banks require at least $1,000 deposit). This way you will have many more options available to you when you are flipping the property.
If the property is owned by an individual (not a bank) then an assignment of contract can be a really low cost entry into wholesaling for beginners. All you need to get started is a purchase contract, $10 and a distressed seller.