How to Wholesale Real Estate with Contract Assignments

Posted in Articles, Featured, Real Estate

How to Wholesale Real Estate with Contract Assignments
I’m often asked to look at a transaction where a real estate investor goes under contract to purchase a piece of property, and then attempts to assign that contract to a new buyer and collect an assignment fee. It’s a simple enoughhttp://www.parhamlawfirm.com/contact-us/transaction, and a great way to wholesale a property  — if done correctly.  The devil is really in the details!
If you’re doing an assignment you need to structure it the right way from the beginning. Here are some musts:
  • The contract MUST say that it is assignable, so check the box if using the commission forms. Better than that, make sure the you add a specific provision in the contract, in your additional provisions or elsewhere, that clearly explains that you, as the buyer, are a real estate investor and that you intend to assign the contract to a new buyer. Make it clear, point it out to the seller and have them initial the provision. It’s amazing how much people “forget” things.
  • When you assign the contract to a new buyer use a written assignment agreement. The agreement should clearly state that once the assignment is signed, the buyer steps into your shoes and becomes the buyer under the existing contract. You’re not signing a new contract between the seller and the new buyer. You don’t need to because you’ve assigned the contract.
  • Deal with earnest money. If you’re assignment fee is paid up front determine whether you’re going to replace the existing earnest money or keep it in place. Think about what would happen if the buyer fails to close and the seller keeps the earnest. Is it your money they will be keeping or the new buyer’s? Do you want to lose earnest money because your new buyer failed to close?
  • Deal with commissions. When you contract with the seller the seller may be expecting only to pay the seller’s agent and not you. If you assign the contract to a buyer with an agent the buyer’s agent is going to want to get paid. The easy solution is to state right in the additional provisions that if an assignee has an agent the seller will agree to pay the agent __% as commission.
  • Figure out whether you’re getting your assignment fee up front, which is best, or whether it will be paid entirely at close, or whether it will paid into escrow in advance pending closing. Keep in mind it’s tough to assign to a retail buyer obtaining financing because the lender usually will not allow the buyer to pay the assignment fee as part of the loan.
  • Notify the seller of the assignment. I recommend a written acknowledgment of assignment that all parties sign that explains the contract has been assigned and the new buyer is now in your place as the buyer under the contract. Provide the notice of assignment to the title company so that the title company communicates with the new buyer and prepares documents in the new buyer’s name instead of yours. Any future contract amendments are not between you and the seller anymore. Once the contract is assigned you’re out and the buyer is the one that must sign off on contract amendments and other documents.

Now, with the Musts, we also have some Dont’s:

  • Don’t structure the assignment as a “finder’s” fee. If you’re finding properties for new buyers and collecting finder’s fees you’re acting as a real estate agent and you need a license.
  • Don’t surprise your seller with an assignment. Seller’s hate surprises. They will kill the deal — sometimes even if you have checked the “assignable” box. Make your intentions clear from the beginning.
  • Don’t use ridiculous one page investor contracts. You never know to who you will be assigning the contract. It may be a retail buyer and they or their realtor may want a commission approved contract form.

This article is intended to provide general information and is not intended to provide legal advice on any specific situation or as a substitute for consulting with legal counsel. If you have any questions about your particular situation please feel free to contact us.

Gregory C. Parham
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