Most people think that the only way to start real estate investing is to either:
The common thread between the options?
A large amount of money paid upfront, coming from your own pocket.
If you don't have a large amount of cash put away, you wonder how you'd ever get your start.
Are you just doomed to watching as investment opportunities pass you by?
Of course not!
There is a third option, a legitimate way of investing in real estate without a money down: real estate assignment contracts.
With assignment contracts, you are not purchasing the property outright; instead, what you are doing is getting the exclusive right to purchase a property within a certain timeframe, an investing strategy referred to as wholesaling.
Some wholesalers choose to put up an earnest money when securing the right to buy a property from a seller, but it is not required. All you have to do is to show up with a real estate contract and an offer to purchase the property for a specified amount by a specified closing date.
However, not all real estate contracts are written the same.
For wholesaling to be a lucrative investing strategy, you have to add a special provision to the purchase agreement before presenting it to the seller: the assignment clause.
An assignment clause in a purchase and sale agreement in real estate gives the original buyer (the assigning party) the ability to "assign" or transfer the rights to purchase a property to a new buyer (the assignee).
This is done by affixing the phrase "and/or assigns" next to your name in the real estate contract.
This means that on the buyer's name, it should say: John Smith and/or assigns.
As long as the seller agrees and signs the assignment contract, then it constitutes their written consent to sell the property to someone other than you.
However, if you forget to put the assignment clause, then you cannot assign the contract to someone else.
When you assign the contract to the new buyer, all the contractual obligations are transferred also, and the end buyer gets full ownership privilege once the transaction is completed.
As there is no free lunch in this economy, you get to collect an assignment fee for your troubles.
In today's hot real estate market, house flippers, landlords, or simply buy-and-hold investors would not pass up investment opportunities such as the chance to buy real estate for lower than the market value.
For best results, it is recommended that you sell the assignment contract to all cash buyers for the following reasons:
Sellers who enter in assignment contracts with a wholesaler are typically motivated sellers, which means they are stuck with a problem property that is either costing them money (major structural damage) or is in danger of being lost (foreclosure or bankruptcy).
In any case, they need to sell fast, and this is where cash buyers can be really helpful.
Generally, the entire process of real estate investing via assignment agreement goes as follows:
Distressed properties, such as those on the brink of foreclosure, can be bought for a huge discount and thus, present an attractive investment opportunity.
First identify an area you're interested in, then scout homes showing visible damage or neglect. You can then get in touch with owners for a potential purchase.
To make a suitable offer on one property you have your eye on, do your due diligence by running comps.
This means looking at comparables ("comps"), or recently sold properties similar to your target purchase in order to establish a basis for your offer. Browsing online listings, or simply driving around the neighborhood and asking around are a good source of information on comparables.
Once you're confident with your offer, present a purchase and sale agreement to the owner. It should contain the buyer and seller information, property details, purchase price, closing date, and other contingencies both parties agree on.
Don't forget to include the assignment clause, as if you forget that, the contract prohibits you from assigning the contract to another investor and you'll be on the hook to buy the property.
After the original contract is signed, you, as the buyer, reserves the right to purchase the property up to a time stated in the contract.
You can then find another buyer to assign the contract to if you don't intend to go ahead with the purchase yourself.
Once the keys and the cash change hands, you are compensated with an assignment fee at the close.
Having the phrase "and or assigns" after your name in the assignment contract template gives you the flexibility of transferring your purchase rights to another buyer for a fee.
In case you change your mind later on and decide to purchase and flip the property yourself for a higher profit, you are also free to do so.
Real estate wholesaling is also known as "contract flipping".
Compared to a full blown house flipping where you have to buy the property and spend for repairs and upgrades prior to selling it for a higher price, with assignment contracts you don't have to do anything to the property before you earn.
The only investment you have to make is your time and effort in finding motivated sellers.
Sometimes, you don't even have to set foot on the property nor even see it with your own eyes before you sell your buying rights to another investor!
Such is the power of a real estate assignment contract.
The buyer's and seller's agent will each get 3% commission off the purchase price. For illustrative purposes, say a house sells for $300,000, realtor fees are a whopping $18,000 (6% of the purchase price).
On the other hand, a real estate wholesaler's assignment fee typically maxes out at $7,000, making it attractive for house flippers and other investors. They get a nice investment property at a discount without breaking sweat since it's a wholesaler who found it for them.
For the owner, this means they pocket more money since they don't have to take anything off the price they have agreed to sell for.
After the assignment of contract to the new buyer takes place, you immediately take yourself out of the equation, and the transaction ultimately happens between the seller and the end buyer.
This means the following:
Honesty and transparency are the hallmarks of a good business person.
If you're a newbie venturing out into your first deal, there's no one yet to vouch for you so you're relying on your word to build your reputation.
It is better to inform the seller beforehand that you intend to transfer the purchasing rights for a profit so that they wouldn't be shocked if another person shows up at the closing table.
There is a well-known saying that goes: "Your network is your net worth."
And it is very true in this line of business. Since wholesaling is mainly facilitating the sale of investment properties between buyers and sellers, you need to have a lot of social capital, which means you need to know a lot of people.
Wholesaling real estate allows you to rapidly expand your network, opening up plenty of opportunities for you down the line.
In flipping assignment contracts, what you are selling is something intangible.
As such, it is heavily dependent on the reliability of the parties at both ends of the deal to uphold the terms of the contract. If either one defaults and the sale falls through, you're the one who is going to look bad.
That's why it is important to have a buyers list ready so that you can have some wiggle room if something unexpected happens.
Or even better, have a backup financing option so you can buy the property yourself if your buyer backs out.
HUD homes and real estate owned (REO) properties typically have anti assignment clauses preventing them from being bought and sold through a contract assignment.
The assignment fee that you are set to receive from the deal is written into the contract for the involved parties to see.
This may turn buyers and sellers off: buyers might feel like they're paying for more than the property is actually worth; and sellers might feel like they missed out on some serious money while a wholesaler gets to make money in their financial distress.
Although you have the exclusive right to buy the property, ultimately, what you have is just a piece of paper. You cannot touch the property, you cannot live in it, you cannot do any upgrades--the list of restrictions go on.
For distressed properties in a state of disrepair, it can be a challenge to sell it even to the most seasoned of house flippers.
The contract states the closing date by which you have to find a buyer. This is due to sellers usually rushing to offload a property that's causing them problems, so they're operating on a short timeframe.
If you are just starting out and your network is still quite small, finding a buyer within a short period of time can be difficult.
The only thing you need to keep in mind to keep everything above board and avoid legal trouble is that you'll have to be the buyer or the seller in the transaction.
Never sell the property in behalf of the owner--that's akin to acting as a real estate agent, and you're going to need a license for that.
This is where having the and or assigns verbiage is useful because you can definitely make money from real estate without having to purchase the property yourself.
Once you got the exclusive right to buy the property, you can transfer said contractual rights to another buyer in exchange for a small fee who will then be the one to fulfill the terms of the original contract.
Real estate wholesaling typically goes like this: you find a buyer and everything seems to be going well and they're set to close in a few days and you're about to get that assignment fee.
Unfortunately, the buyer calls you to say that they aren't going ahead with the deal.
Are you on the hook to buy the property?
The answer is yes, unless you want to breach the contract and ruin your reputation as a wholesaler.
But, as long as you did your due diligence, crunched the numbers, and found that the property is a great buy, you shouldn't be worried about losing money.
You're guaranteed to make money eventually, maybe not as fast as if it was a straight up wholesale transaction, but there's nothing to be scared of about getting "stuck" with the property in the meantime as you look for a buyer.
When you choose the double closing method, there is an extra step to the ones outlined above: fund the real estate purchase yourself using your own cash, or through hard money loans. Although it has a higher interest rate versus traditional options, hard money loans are favored by real estate investors due to fast approvals and interest-only payment options.
In any case, with double closing, you buy the property at the price you and the seller agreed upon beforehand, and then afterward, you sell it to your end buyer.
Sometimes, double closing can even happen on the same day if you time it right!
This means, the seller and the end buyer ultimately never have to meet. They may not even be aware of the other party, so you don't have to worry about protecting your profits from the scrutiny of either party, and no one would walk away from the transaction feeling ripped off.
That's not to say wholesaling is essentially ripping off people, not at all!
You put together the deal, you connected a motivated buyer with an all cash buyer, of course you deserve just compensation for your efforts in the form of an assignment fee. Sellers walk away with the cash to start anew, and the real estate investors gain a property they intend to make money off on.
Everybody wins!
The downside to double closing versus a real estate assignment contract is having to pay the closing costs twice. This is because ownership is transferred to you, regardless of how brief it is.
And it isn't just the cost that is doubled, you also double the paperwork!
If you figure that a double close is not for you, then you're better off doing a real estate assignment contract. That way, you're able to collect your fee without paying a cent in closing costs!
Now that you have perfected your real estate contract, you feel like you're ready to embark on your first wholesale deal.
The first step that you need to take is to find the right investment property. The typical criteria are as follows:
While it may sound like a tall order, with Property Leads, we can help you find the property you're looking for!
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If you're interested on taking your real estate investing business to the next level, sign up below and we'll quickly arrange a call with you to have high quality leads delivered straight to your inbox!
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