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How A Real Estate Assignment Contract Works

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Real estate assignment contracts are an important tool for real estate investors, particularly real estate wholesalers. While most real estate purchases don’t involve assignment contracts, they’re a necessity for investors who aren’t personally planning to purchase a property.

Real estate wholesalers enter into an agreement with the seller called a purchase and sale agreement. This agreement establishes that the wholesaler has equitable interest in a property, meaning that the house is in the process of being sold and the wholesaler has a financial tie to the transaction. A real estate assignment contract transfers the equitable interest to a cash buyer, giving them a right to close on the property in place of the wholesaler.

Understanding Real Estate Wholesaling

Real estate assignment contracts are at the core of wholesale real estate. Wholesaling is a real estate investment strategy in which a wholesaler finds a property that is either physically or financially distressed and enters into a contract with the seller that establishes the wholesaler’s right to buy the house, typically for less than market value. 

The wholesaler then approaches a buyer, typically a real estate investor, and assigns them the right to buy the property. Real estate wholesalers will always negotiate a higher price with the buyer than the amount they’ve agreed upon with the seller. The difference between the two prices, which is often referred to as the spread, is how a real estate wholesaler makes money from the transaction. 

While real estate wholesaling may sound simple and straightforward, it can take a lot of time and effort  to find motivated sellers and investors who are able to buy the property. Wholesalers need to network consistently to create a pool of potential buyers for their distressed properties. In order to find a motivated seller, real estate wholesalers typically have to approach many distressed property owners to get just one property under contract. A distressed property can be a property that is in severe disrepair or has a financial distress factor. 

A few of the most common financial distress factors include pre-foreclosure, tax default, low or negative equity, and high interest rate. Wholesalers who invest in real estate data platforms can easily search for properties with financial distress factors. 

Assignment Contract Legalities

Real estate wholesaling is legal in all fifty states and anyone can be a wholesaler. While you do not need a real estate license to wholesale, some states have restrictions on how wholesalers can legally market their properties if they do not have a real estate license. This is why many wholesalers have real estate licenses, allowing them to sidestep these restrictions. 

There’s another key advantage to having a real estate license. If a wholesaler assesses a property and realizes that it could sell for more in a traditional sale, the wholesaler could offer to represent the seller in a conventional sale of the property.    

Creating an Assignment Contract

When creating an assignment contract, it’s best to work with an attorney who’s well versed in the laws and regulations around real estate wholesaling in your state and municipality. Wholesalers who try to cut this corner by using a contract they found online can experience problems later if it’s a poorly written contract or one that’s written for a market with different regulations. 

In order to create an assignment contract, there must first be a purchase deal between the homeowner and the wholesaler. The purchase deal, also referred to as a wholesaling contract, states that the wholesaler has the right to buy the property. 

When the wholesaler secures an investor who is interested in buying the property, the two parties enter into a real estate assignment contract. This contract transfers all obligations from the wholesaler to the buyer. The same terms outlined in the purchase deal carry over to the buyer except for the price of the property. 

The key elements of an assignment contract are: 

  • A copy of the original wholesale contract or purchase deal
  • The legal names of the buyer and seller
  • The property’s street address, type of property, and assessor’s parcel number (APN)
  • The physical condition of the property, including any defects and repairs
  • The purchase price as well as specifications regarding financing and deposits (if applicable)
  • The closing date
  • Any contingencies

Completing the Sale

To complete the sale, the buyer transfers the money for the agreed-upon purchase amount to the title company. The difference between the sale price in the assignment contract and the purchase deal is the spread, and it is paid to the wholesaler by the title company.

If for some reason the buyer backs out of the sale, the seller does not get paid nor does the wholesaler. This is why it’s important that the wholesaler has a database of potential buyers to come through if the intended buyer doesn’t follow through with the purchase. Wholesalers can also protect themselves with a contingency clause in the purchase deal stipulating that the wholesaler isn’t obligated to buy the property if the buyer backs out.

Conclusion

Real estate wholesaling has exploded in popularity in the past few years. While that has resulted in limited inventory in a lot of markets, savvy wholesalers can use technology to wholesale remotely

But whether you’re a wholesaler who’s buying properties within your community or on the other side of the country, assignment contracts are an essential part of the transaction. As we stated earlier, make sure that you work with an attorney who understands wholesaling to create a real estate assignment contract that will protect you and your money.


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