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.”
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
Click Here to Download
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!
Precrastinators, as recently noted in the New York Times, have a tendency to finish tasks sooner than they need to, even if it costs them more time and energy than if they waited.
New research from Pennsylvania State University shows that people are willing to expend large amounts of physical effort just to have the feeling of completing a task.
In one experiment, students were asked to pick one of two buckets and bring them to the end of an alleyway.
One bucket was placed closer to the end point, therefore requiring less physical effort, and the other was placed closer to the start. Students were advised to choose the first, easier task — yet most of them chose the bucket closer to them, even though they had to carry it farther.
The reason they were willing to do so was because the assigned task was weighing on their minds. They wanted to get it done as soon as they could, just to lighten their mental loads.
This helps explain why people are often inclined to clean their rooms, answer emails, or wash the dishes before starting their "real work." It allows them to feel like they are actually getting things done and to check something off their mental to-do list, even though it isn't necessary at the moment.
The problem is that when people spend their time on the wrong things, they postpone the important tasks until they're too exhausted to devote sufficient mental energy toward them. According to the Times article, "People who are checking things off the list all the time might look like they're getting stuff done, but they're not getting the big stuff done."
Even though the task at hand gets finished quickly, performance on other tasks may decrease in quality as people rush to complete something else. Precrastination also results in missed opportunities for cognitive processing, because people don't give themselves the time to think things through.
Furthermore, if people finish their work early, they might waste the remaining time. "Suppose you have two employees, and you give them both a task," says John Perry, professor emeritus of philosophy at Stanford University. "One of them is a procrastinator, so they spend the entire day doing other tasks before finishing their assignment. Another one isn't a procrastinator and finishes the task early, but then spends the rest of the day loafing around." In this example, the procrastinator accomplishes more than the one who gets the job done early.
Precrastination is tempting because it feels so good. In an article for The Guardian, Oliver Burkeman writes, "The special danger of precrastination is that, unlike procrastination, it doesn't feel naughty."
A root of precastination is that people tend to treat insignificant tasks as more urgent than they truly are. For example, they are inclined to respond to emails immediately after they receive them, even though their inbox isn't necessarily the most important thing to attend to.
To prevent this mistake, try using the Eisenhower Box. Sort your tasks into four boxes: urgent and important, important but not urgent, urgent but not important, neither urgent nor important. This will help you prioritize your tasks and become more productive and efficient with your time.
You can also stick to a simple rule. Schedule a time to relieve yourself of the minor tasks taking up your mental load by blocking off an hour or so in your calendar for chores. That way, whenever you are tempted to get the "little things" out of your way first, write them down in your calendar and continue with your work. You can also practice mindfulness training, which will help you reduce your overall stress levels.
As Burkeman writes, "It's time to abandon the secret pride we precrastinators feel in having completed 25 small tasks by 10 a.m.: if they're not the right tasks, that's not really something to be proud of."