- October 19, 2020
- Posted by: Editor
- Category: Advice, Investment, Legal, Strategy
There are several real estate investment strategies to consider when thinking about purchasing real estate. This includes buying rental property, flipping houses, buy and hold, and real estate investment trusts. Another lucrative strategy for making money in the real estate industry is real estate wholesaling. This basically involves finding real estate deals that you don’t 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.
Legality of Assignment of Contract
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 doesn’t 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 contracts within a specific time period.
Procedures for Assignment of Contract
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. 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.
- 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.
- Submission of 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
You can find potential buyers using methods such as cold calling, posters and signs, newspaper ads, social media ads 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.
- Assign the contract
Once you’ve found an interested buyer, the first thing you need to do is ask for an earnest cash deposit. Your contract should clearly mention that money will be paid upfront. This clause will protect you from any breach of contract. Since the earnest money is non-refundable, you are assured of making a profit, whether the deal closes or not.
- Get paid
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.
Real estate assignment of contract takes less time to complete compared to other real estate investment strategies and requires little or no capital. However, working with sellers and buyers that are not conversant with assignment of contracts can be challenging. In addition, you might find a buyer that will want to back out at the last minute