a REAL Guide: Assigning Contracts to Buy Real Estate (better than wholeselling)
Introduction
Assigning contracts in real estate is a strategy where you, as an investor, enter into a purchase agreement with a seller and then assign that agreement to a buyer for a fee. Unlike wholesaling, where you may take possession of the property temporarily, assigning contracts typically involves no property ownership at any point (not even a double closing). This method allows you to earn a profit without needing large amounts of capital or taking on the risks associated with property ownership. Below is a step-by-step guide that covers everything you need to know, from finding deals to ensuring you stay ethical and compliant with laws.
1. Understanding the Basics of Assigning Contracts
1.1 What is Contract Assignment?
Definition: A contract assignment involves you (the assignor) entering into a purchase agreement with a property seller, with the intention of assigning that contract to another buyer (the assignee) for a fee. The buyer you assign the contract to will complete the purchase.
Difference from Wholesaling: In wholesaling, you may take temporary ownership of the property before selling it. In contract assignment, you never take ownership—you simply sell the rights to buy the property.
1.2 Legal Considerations
Check Local Laws: Contract assignments are not legal in every state. Ensure that this strategy is allowed in your state or local jurisdiction.
Assignment Clauses: The purchase agreement must include an assignment clause, which explicitly states that the contract can be assigned to another party.
2. Finding Real Estate Deals
2.1 Understanding the Market
Market Research: Identify markets where properties are undervalued or where there is high demand from investors or home-buyers.
Property Types: Focus on properties that investors typically seek—distressed homes, fixer-uppers, or homes in emerging neighborhoods.
2.2 Lead Generation
Direct Mail Campaigns: Send letters or postcards to homeowners, particularly those in distress (e.g., foreclosure, divorce).
Online Marketing: Use social media and Google Ads to generate leads.
Networking: Build relationships with real estate agents, wholesalers, and other investors who may have leads.
Public Records: Search for properties with delinquent taxes or other signs of distress.
2.3 Initial Deal Analysis
Quick Evaluation: Assess potential deals by looking at comparable sales (comps) in the area to estimate the current market value.
Motivation Check: Gauge the seller's motivation—distressed sellers are often more willing to negotiate favorable terms.
3. Evaluating Properties and Understanding Value
3.1 Estimating Current Value (As-Is)
Comparative Market Analysis (CMA): Look at recent sales of similar properties in the area.
Property Condition: Inspect the property to understand its condition, which will affect its current value.
3.2 Estimating After Repair Value (ARV)
ARV Calculation: Estimate the value of the property after all repairs and improvements are made. This requires a deep understanding of the local market and the types of upgrades that add the most value.
Use Online Tools: Websites like Zillow, Redfin, and Realtor.com can provide estimates, but they should be cross-verified with local data.
3.3 Estimating Repair Costs
Get Contractor Bids: Work with contractors to get estimates on repair costs.
DIY Tools: Use tools like the REI Repair Estimator to calculate repair costs based on square footage and property condition.
4. Negotiating with Sellers
4.1 Building Rapport
Seller's Needs: Understand the seller's motivations (e.g., quick sale, financial difficulties).
Create Win-Win Situations: Offer terms that address their needs while allowing you to profit from the deal.
4.2 Making an Offer
Present a Fair Offer: Based on your evaluation, make an offer that allows you room to assign the contract for a profit. Remember to leave enough margin for the end buyer to make a profit after repairs and other costs.
Include an Assignment Clause: Ensure that the contract explicitly states it can be assigned to another party.
4.3 Contingencies
Inspection Period: Include a clause that allows for an inspection period. This gives you time to find a buyer and back out if you can't assign the contract.
Financing Contingency: Protect yourself by including a financing contingency if you need more time to secure a buyer.
5. Marketing to Buyers
5.1 Building a Buyer’s List
Investor Networks: Join local real estate investment groups or online forums to connect with potential buyers.
Real Estate Agents: Work with agents who specialize in investment properties. They often have clients looking for deals.
Online Platforms: Use platforms like Craigslist, BiggerPockets, and Facebook Marketplace to advertise deals.
5.2 Presenting the Deal
Highlight Key Details: When marketing the contract, provide key information such as the ARV, repair estimates, and the purchase price.
Professional Presentation: Create a deal packet with photos, comps, repair estimates, and a clear summary of the opportunity.
Set a Deadline: Encourage urgency by setting a deadline for offers.
6. Assigning the Contract
6.1 Drafting the Assignment Agreement
Assignment Fee: Specify the assignment fee—the amount the new buyer pays you for assigning the contract.
Assignment of Contract: Clearly outline that you are assigning all your rights and obligations under the original purchase agreement to the buyer.
Signatures: Ensure both you and the assignee sign the assignment agreement.
6.2 Closing the Deal
Coordinate with Title Company: Work with a title company or real estate attorney to ensure the closing goes smoothly. They will handle the transfer of the contract and ensure you get paid.
Get Paid: Your assignment fee is usually paid out at closing. Ensure all parties understand how and when you will be paid.
7. Ensuring Ethical Practices and Compliance
7.1 Full Disclosure
Transparency: Be honest with all parties involved. Ensure the seller knows the contract might be assigned, and the buyer knows the full details of the deal.
Avoid Misrepresentation: Never misrepresent the value of the property or your role in the transaction.
7.2 Legal Compliance
Consult an Attorney: Have a real estate attorney review your contracts to ensure they are compliant with local laws.
Licensing: Some states require you to be a licensed real estate agent to assign contracts. Verify the requirements in your area.
8. Scaling Your Business
8.1 Building a Team
Networking: Continuously build relationships with real estate agents, contractors, title companies, and other investors.
Outsourcing: As you grow, consider outsourcing tasks such as lead generation, marketing, and contract negotiations to focus on closing deals.
8.2 Automating Processes
CRM Systems: Use Customer Relationship Management (CRM) tools to manage leads and buyers.
Project Management Tools: Platforms like Asana or Trello can help you track the progress of each deal.
8.3 Expanding Your Reach
Target New Markets: Once you have mastered one market, consider expanding to other areas with similar opportunities.
Diversify Strategies: Explore other real estate investment strategies, such as wholesaling, rehabbing, or buy-and-hold, to create multiple income streams.
9. Lastly
Assigning contracts in real estate can be a profitable and relatively low-risk way to get started in the real estate industry. However, success in this strategy requires a solid understanding of the market, strong negotiation skills, ethical practices, and legal compliance. By following the steps outlined in this guide, you can develop a system that allows you to consistently find and assign contracts, building a successful real estate business without the need for significant upfront capital.
Appendix: Sample Forms and Contracts
Purchase Agreement Template - A basic template including an assignment clause.
Assignment of Contract Agreement - Template for assigning your contract to another buyer.
Property Evaluation Worksheet - A tool to help you calculate current value, ARV, and repair costs.
Deal Summary Sheet - A template for presenting deals to potential buyers.
This guide is a comprehensive roadmap to start assigning contracts in real estate, ensuring you are well-prepared to navigate every aspect of the process.