Real Estate Wholesaling Explained: How an Assignment of Contract Works

See the full blog post here: https://retipster.com/wholesaling

You can also get a solid overview in this blog post: https://retipster.com/wholesaling2

The concept of assigning contracts can be tricky to grasp at first, so I’ll start by explaining how assignments were MEANT to be used and then I’ll give an example of how they can be used.

Let’s say you’re a real estate investor who DOESN'T like to buy properties with basements. One day, you get a lead on an investment property from a seller who says the property is built on a slab foundation.

You both agree to enter into a purchase agreement, but during your due diligence, you find that the seller wasn’t entirely honest with you, and the property DOES indeed have a basement.

At this point, you have two options:

You can back out of the deal and walk away OR,

If you happen to know another investor who doesn’t mind properties with basements, and they like the deal, you can assign your rights in the purchase agreement to this other investor, for a fee.

Now in order for this to work, you need to make sure the original purchase agreement has the proper legal jargon that gives you the ability to do this, but as long as it's there, instead of walking away with nothing, you can walk away with a little money in your pocket.

You and the new investor would complete a new contract called an Assignment Agreement. This agreement explains that new investor is replacing you as the buyer, and they are also paying you an assignment fee, which compensates you for your trouble and allows them to buy their way into the purchase agreement to assume your position as the purchaser.

When this is done correctly and the deal is closed, you’ll be able to walk away with some money in your pocket, the seller is able to sell their property and the new investor is able to get a deal. It’s a true win-win for everyone involved.

This is how assigning contracts are MEANT to be used, but here’s a question - wasn’t it interesting how you were able to walk away with money in your pocket, even though you never put any of your own money into the deal personally?

What if you used this concept just to find deals for end buyers? Think of how many more deals could you do if you weren’t actually buying anything yourself and if you didn’t have to come up with any of the cash on your own?

This is where the loophole comes in: some investors, specifically real estate wholesalers, commonly assign contracts, with the full intent of assigning them to another buyer for a fee.

Some wholesalers actually build their entire business model around doing assignments!

Here’s an example: Let’s say you get a property under contract for $50,000. You then find another investor who has the cash and wants to buy your position in that contract, and so they pay you a $5,000 assignment fee to take over the deal.

The buyer is still getting a great deal on the property for $55,000 all-in, the seller is still able to sell off their property and you get to walk away with $5,000.

It’s a pretty sweet deal, right?

This business model is intriguing because if done correctly, you can make thousands of dollars just by acting as the middle man and connecting sellers with buyers, with little-to-none of your own money involved in the transaction.

On paper, it sounds pretty great, but we want to strongly suggest you seek legal advice as to whether or not this strategy is actually legal. Some states have basically outlawed assigning contracts without the involvement of a licensed real estate agent.

When you enter into a purchase agreement WITHOUT the actual intent to buy the property yourself, the contract can be somewhat misleading, and in some jurisdictions the purchase agreement may effectively be null and void.

If your primary business model is to do these types of assignments, and you’re not a licensed real estate agent, it could be interpreted that you’re acting as a real estate agent without a license.

There are differing opinions on the legality and ethics behind this type of transaction but as you can imagine, when it’s done correctly and communicated clearly to all parties involved, it can work to everyone’s benefit.

Unfortunately, it’s not always done correctly or communicated clearly, and when deals fall apart, it’s definitely NOT a win-win situation for the parties involved.

Some local governing bodies are more strict with their laws than others, and this is why it’s in your best interest to consult with a local real estate attorney in your area to ensure you understand what is and isn’t allowed, to make sure you’re using the right documentation, and that all parties involved are acting within the confines of the law.

We hope this explanation helps you understand the basics of how an assignment works in real estate. Again, we’re not lawyers and this video isn’t intended to be legal advice, so be sure to talk with a legal professional in your area before you dive into this strategy any further.

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