If you’re new to real estate investing, there is a term called “contract assignment.” If you have not come across this term or you are unsure of the intricate parts of contract assignment, I am going to spell it out. If need be, re-read this article again and again. Also do not be afraid to ask questions in the comment section below.
We are in the prime selling season in most markets. During this time, investors are normally busy trying to lock down as many properties as possible. In our market, Phoenix, we are seeing an influx of buyers looking for deals. I recently had a conversation with a group of investors looking to get their hands on almost anything that will generate a profit. It would seem that we have not learned from the previous market crash how the real estate climate can change in an instance. My philosophy is ride the storm and assign as many real estate deals as possible.
If you have sat through any get-rich-quick guru pitches, the majority of them will introduce contract assignment wholesaling, but without giving you all the steps involved. Here is what they are referring to when they say “make $5,000 in the next 60-90 days.”
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What is a Contract Assignment?
Short and simple. This is when you first find a property a seller is willing to sell significantly below market value. You then resell that property to another buyer, normally a real estate investor, at a higher price.
Can This Be Done?
Absolutely, I’ve done numerous transactions in Phoenix, although it is not as easy as it’s normally taught, however it is a proven real estate investment strategy with a very low barrier to entry.
How Exactly Does Contract Assignment Work?
1. Find a motivated seller.
First let’s begin with what a motivated seller is. This is an individual who NEEDS to sell a property normally very quickly. There is usually some sort of distress going on in their lives. There is a huge disparity between want to sell and need to sell. Knowing which category your seller falls into is the first step in identifying how to handle the situation.
If I want to sell, there is no since of urgency. There’s normally no timeframe in which to finalize the sale. However, “need to sell” sounds like this :”I have to sell this house now because I’m moving to Maryland to take care of my ailing mother, and I have no other family members in the area.” This is a “need to sell” scenario.
Meanwhile, “want to sell” sounds a lot different: “I’m curious to see what my house is worth because I may be selling next year.” As you can see, there is a reason behind the need to sell versus the second scenario, where there is just curiosity.
There are numerous ways to find motivated sellers, such as driving for dollars, newspaper ads, internet marketing, direct mail marketing, etc. If you begin to research real estate marketing, you will find many forms, but make sure you use a combination of multiple strategies.
Related:Wholesalers Get a Bad Rap — But They’re Essential to Investors for These 3 Reasons
2. Get the contract.
There are many assignment contract templates on the web; however, I make sure an attorney at least has laid his/her eyes on it and approves the document. There are two reasons this is so critical. First, you will have comfort knowing your document is legally sound. Second, you will be able to utilize that attorney as counsel in the event you find yourself in litigation.
There is critical verbiage that need to be added to your assignment contract “and/or assigns.” Why is this so critical? This verbiage authorizes you to re-trade the property to another buyer who is interested in the property. When you receive the signed contract, you now have equitable interest in the property and have some legal standing in what happens to the property.
To provide clarity to the seller if asked about the “and/or assigns” clause, I inform them that we buy numerous houses, and we often have funding partners that we work with. These partners ensure we have more than one set of eyes to run the numbers.
3. Submit contract to title.
This process may differ in each state, but there is normally either a title company or a closing attorney that will conduct a title search. The title search will check the historical records of the property to make sure there are no liens on the property. It is important not to sell a property with a defective title. The title company or the closing attorney is a independent third party hired to make sure the deal is fair as agreed upon in the contract.
4. Find your buyer and assign the contract assignment.
Here is another leg of marketing. Working to find your end buyer can be daunting, but once you have a solid buyer, you can begin the process of closing the transaction. First, when you find your buyer (via Craigslist ads, Zillow, email marketing etc.), you should require a nonrefundable earnest money deposit.
Having the buyer furnish an nonrefundable earnest money deposit secures your position in making a profit. This money will become yours whether the transaction closes or not. The earnest money can be as much or as little your require within reason. I’ve seen deposits of hundreds of dollars up to $5,000. When the buyer deposits the earnest money, you then know that your buyer has a real interest in the property and is willing to move forward. This fee is normally held by the title company or the closing attorney.
5. Get Paid!
This is what most of us want to hear. We get paid when the end buyer wires in the funds for the deal. This money will cover what you stated you were willing to buy the property from the seller for, as well as your fee for facilitating the transaction. As an example, if you told the seller you would buy the house for $45,000 and you then sold your interest in the property to the buyer for $50,000, then your assignment fee is $5,000.
Related:The Harsh Truth About Wholesaling Newbies Need to Know
It is important that everything is disclosed because I’ve seen transactions stall at the closing table due to the seller or the buyer does not agreeing with you as the assignor making money. Again, this is why you inform you seller specifically that you are going to make a profit; however, ensure them that they will still receive the amount agreed upon for the price.
It is standard practice that assignments are done only on profits of $5,000 or below. But if you are comfortable with the seller and the buyer, it’s possible to assign a contract for a much higher fee.
In the event you are not comfortable with all parties in the transaction, a double close or simultaneous close will keep both legs of the transaction anonymous. Be aware not all title companies will agree to conduct a double close, so this needs to be discussed in advance.
Contract assignment cannot be done on all transactions. HUD homes, REOs, and listed properties present many barriers when trying to perform this type of transaction. With many REO properties, the lender will ensure there is a seasoning period — normally 90 days — before you can resell the property.
As you can see, there are some clear benefits to contract assignment for big paid days.
Investors: Have you ever assigned a contract? Any questions about this process?
Let me know your thoughts with a comment!
Bought a pre-construction condo and looking to sell it before you take possession? Here’s what you need to know.
What’s an assignment?
An assignment is when a Seller sells their interest in a property before they take possession – in other words, they sell the contract they have with the Builder to a new purchaser. When a Seller assigns a property, they aren’t actually selling the property (because they don’t own it yet) – they are selling their promise to purchase it, along with the rights and obligations of their Agreement of Purchase and Sale contract. The Buyer of an assignment is essentially stepping into the shoes of the original purchaser.
The original purchaser is considered to be the Assignor; the new Buyer is the Assignee. The Assignee is the one who will complete the final sale with the Builder.
Do assignments only happen with pre-construction condos?
It’s possible to assign any type of property, pre-construction or resale, provided there aren’t restrictions against assignment in the original contract. An assignment allows a Buyer of a any kind of home to sell their interest in that property before they take possession of it.
Why would someone want to assign a condo?
Often with pre-construction sales, there’s a long time lag between when the original contract is entered into, when the Buyer can move in (the interim occupancy period) and the final closing. It’s not uncommon for a Buyer’s circumstances to change during that time…new job out of the city, new husband or wife, new set of twins, etc. What worked for a Buyer’s lifestyle 4 years ago doesn’t always work come closing time.
Another common reason why people want to assign a contract is financial. Sometimes, the original purchaser doesn’t have the funds or can’t get the financing to complete the sale, and it’s cheaper to assign the contract to a new purchaser, than it is to renege on the sale.
Lastly, assignment sales are also common with speculative investors who buy pre-construction properties with no intention of closing on them. In these cases, the investors are banking on quick price appreciation and are eager to lock in a profit now, vs. waiting for the original closing date.
What can be negotiated in an assignment sale?
Because the Assignee is taking over the original purchaser’s contract, they can’t renegotiate the price or terms of the contract with the Builder – they are simply taking over the contract as it already exists, and as you negotiated it.
In most cases, the Assignee will mirror the deposit that you made to the Builder…so if you made a 20% deposit, you can expect the new purchaser to do the same.
Most Sellers of assignments are looking to make a profit, and part of an assignment sale negotiation is agreeing on price. Your real estate agent can guide you on price, which will determine your profit (or loss).
Builder Approval and Fees
Remember that huge legal document you signed when you made an offer to buy a pre-construction condo? It’s time to take it out and actually read it.
Your Agreement of Purchase & Sale stipulated your rights to assign the contract. While most builders allow assignments, there is usually an assignment fee that must be paid to the Builder (we’ve seen everything from $750 to $7,000).
There may be additional requirements as well, the most common being that the Builder has to approve the assignment.
Most pre-construction Agreements of Purchase & Sale from Toronto Builders do not allow the marketing of an assignment…so while the Builder may give you the right to assign your contract, they restrict you from posting it to the MLS or advertising it online. This makes selling an assignment extremely difficult…if people don’t know it’s available for sale, how they can possibly buy it?
While it may be very tempting to flout the no-marketing rule, BE VERY CAREFUL. Buyers guilty of marketing an assignment against the rules can be considered to have breached the Agreement, and the Builder can cancel your contract and keep your deposit.
We don’t recommend advertising an assignment for sale if it’s against the rules in your contract.
So how the heck can I find a Buyer?
There are REALTORS who specialize in assignment sales and have a database of potential Buyers and investors looking for assignments. If you want to be connected with an agent who knows the ins and outs of assignment sales, get in touch…we know some of the best assignment agents in Toronto.
What are the tax implications of real estate assignment?
Always get tax advice from a certified accountant, not from the internet (lol).
But in general, any profit made from an assignment is taxable (and any loss can be written off). The new Buyer or Assignee will be responsible for paying land transfer taxes and any HST that might be due.
How much does it cost to assign a pre-construction condo?
In addition to the Builder assignment fees, you will likely have to pay a real estate commission (unless you find the Buyer yourself) and legal fees. Because assignments are more complicated, you can expect to pay higher legal fees than you would for a resale property.
How does the closing of an assignment work?
With assignment sales, there are essentially 2 closings: the closing between the Assignor and the Assignee, and the closing between the Assignee and the Builder. With the first closing (the assignment closing) the original purchaser receives their deposit + any profit (or their deposit less any loss) from the Assignee. On the second closing (between the Builder and the Assignee), the Assignee pays the remaining amount to the Builder (usually with the help of a mortgage), and pays land transfer taxes. Title of the property transfers from the Builder to the Assignee at this point.
I suppose it could be said that there is a third closing too, when the Buyer takes possession of the property but doesn’t yet own it…this is known as the interim occupancy period. The interim occupancy occurs when the unit is ready to be occupied, but not ready to be registered with the city. Interim occupancy periods in Toronto range from a few months to a few years. During the interim occupancy period, the Buyer occupies the unit and pays the Builder an amount roughly equal to what their mortgage payment + condo fees + taxes would be. The timing of the assignment will dictate who completes the interim occupancy.
Assignments vs. Resale: Which is Better?
We often get calls from people who are debating whether they should assign a condo they bought, or wait for the building to register and then sell it as a typical resale condo.
Pros of Assigning vs. Waiting
- Get your deposit back and lock in your profit sooner
- Avoid paying land transfer taxes
- Avoid paying HST
- Maximize your return if prices are declining and you expect them to continue to decline
- Lifestyle – sometimes it just makes sense to move on
Cons of Assigning vs Waiting
- The pool of Buyers for assignment sales is much smaller than the pool of Buyers for resale properties, which could result in the sale taking a long time, getting a lower price than you would if you waited, or both.
- Marketing restrictions are annoying and reduce the chances of finding a Buyer
- Price – What is market value? If the condo building hasn’t registered and there haven’t been any resales yet, it can be difficult to determine how much the property is now worth. Assignment sales tend to sell for less than resale.
- Assignment sales can be complicated, so you want to make sure that you’re working with an agent who is experienced with assignment sales, and a good lawyer.
Still thinking of assignment your condo or house? Get in touch and we’ll connect you with someone who specializes in assignment sales and can take you through the process.