An assignment of contract can be one of the most powerful tools available to real estate investors. Although it is easy to use most investors don't know how to use one effectively. Bottom line: the basic structure of the contract assigns the rights and responsibilities to another party or assignee.
Flippers use it when assigning the rights and responsibilities of the contract over to another investor or to whoever they are wholesaling the property to. It can also be an entity like an LLC
or a trust.
New investors benefit from using an assignment of contract because it lets them complete a transaction and get paid without ever owning or closing on the property.
And that is especially great when you have zero or very little cash to invest.
Sometimes investors need to immediately increase cash flow. When you assign your rights to someone else you immediately get a assignment fee. In some states for legal and tax reasons, it is referred to an assignment fee, consultation fee, or a transfer fee, or earnest money. However never refer to it as a commission. Check with your closing company, attorney and tax advisor to find out which is best for you.
You can stipulate that 100% of the fee needs to be paid at the signing or that 50% of the fee at signing and 50% at closing. By accepting the fee this way you get protection from a possible breach of contract. Also the investor has extra incentive to close because the assignment fee is non-refundable. This strategy instantly let you know which investors are serious. Remember you are the party in control. By clearly stating what is expected then there will not be any misunderstandings.
The amount of the assignment fee can be a flat rate or a % of the selling price. The standard fee is around 5,000. However there are times when the fee will be much larger.
For example, if you had negotiated an extremely low purchase price or if the property was a high end white elephant or perhaps the property is zoned commercial. This is when you do not want your buyer to know how much money you are making. Instead, when these opportunities arrive, use a simultaneous closing instead of an assignment of contract.
Set yourself up for success by always writing your purchase contract in the name of an LLC or trust. We prefer a trust because:
1. it is cost effective;about $400 to create and $100yearly to maintain and a trust
attorney does the paperwork.
2. And because legally we can transfer the trust by signing it over to a buyer. Since,
it's considered a transaction and not a sale closing costs are minimal. Always look
for ways to legally offset or sidestep taxes because it's a strategy that can keep
fixed costs low.
3. Trusts provides privacy and asset protection from prying eyes and lawsuits.
All contracts are assignable unless it specifically states that it is not.
Nonassignable contracts are used by Realtors, government entities like HUD and
Freddie Mac, or Banks and lending institutions. Sometimes you just can't avoid them
so work with them. Here's how to do it.
It comes with fill in the blanks instructions and is totally customizable.
We hope to see you out there kickin' assets.