Real Estate Wholesaling Explained: How an Assignment of Contract Works
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Real Estate Wholesaling Explained: How an Assignment of Contract Works


(light music) – [Narrator] When it comes
to assigning contracts in real estate, the concept can be a little tricky to grasp at first. So I’m gonna start by
explaining how assignments were meant to be used,
and then I’m gonna give an example of how they can be used with an interesting loophole. Let’s say you’re a real estate investor who doesn’t like to buy
properties with basements. One day, you get a lead
on an investment property from a seller who says the property was built on a slab foundation. You both agree on doing a deal and enter into a purchase agreement but, lo and behold,
during your due diligence you find out that the seller wasn’t entirely honest with you, and the property does indeed have a basement. (screams) At this point, you have two options: You can back out of
the deal and walk away, or if you happen to know another investor who doesn’t mind properties with basements and they like the deal,
you can assign your rights in the purchase agreement to
this other investor for a fee. Now, in order for this to
work, you need to make sure that the original purchase agreement has the proper legal jargon that gives you the ability to be able to do this. But as long as it’s in
there, instead of walking away with nothing but
a waste of your time, you can actually walk away with a little money in your pocket. The process looks like this:
you and the new investor would complete a brand new contract called an assignment agreement. This agreement lays out the terms of how this new investor is
replacing you as the buyer, and that they’re also
paying you an assignment fee which compensates you for your trouble and allows them to buy their way into the purchase agreement to assume your position as the new purchaser. When this is done correctly
and the deal is closed, you’ll be able to walk away with some money in your pocket,
the seller is still able to sell their property,
and the new investor is able to get a great deal. It’s a true win-win for everyone involved. This is how assigning
contracts are meant to be used. Here’s a question: wasn’t it interesting how you were able to walk away with money in your pocket even though you never put any of your own money
into the deal personally? What if you use this concept just to find deals for end buyers? Think of how many more deals you could do if you weren’t actually
buying anything yourself, and you didn’t have to come up with any of the cash on your own. This is where the loophole comes in. Some investors, specifically
real estate wholesalers, commonly assign contracts
with the full intent of assigning them to
another buyer for a fee. Some wholesalers actually build their entire business model
around doing these assignments. Here’s an example: Let’s say you get a property under contract for 50,000 dollars. You then find another
investor who has the cash and wants to buy your
position in the contract, and so they pay you a 5,000 dollar assignment fee to take over the deal. The buyer is still getting a great deal on the property for 55,000 dollars all in, the seller is still able
to sell off their property, and you get to walk
away with 5,000 dollars. It’s a pretty sweet deal, right? This business model is intriguing because, if done correctly, you could
make thousands of dollars just by acting as the middle man and connecting motivated
sellers with cash buyers with little to none of your own money involved in the transaction. On paper, this all sounds pretty great, but we want to strongly suggest
that you seek legal advice as to whether or not this
strategy is actually legal. Some states have basically
outlawed assigning contracts without the involvement of a
licensed real estate agent. The reason is, when you enter
into a purchase agreement without the actual intent to
buy the property yourself, the contract is somewhat misleading and, in some jurisdictions,
the purchase agreement may effectively be null and void. Likewise, if your primary business model is to do these type of assignments and you’re not a licensed
real estate agent, it could be interpreted that you’re acting as real estate agent without a license. Understandably, there
are differing opinions on the legality and ethics
behind this type of transaction, but, as you can imagine,
when it’s done correctly and communicated clearly
to all parties involved, it can work to everyone’s benefit. In different markets around the country, some local governing
bodies are more strict with their laws than
others, and this is why it’s in your best interest to consult with a local real estate
attorney in your area just to ensure you understand
what is and isn’t allowed, to make sure you’re using
the right documentation, and that all parties involved are acting within the confines of the law. We hope this explanation
helps you understand the basics of how an assignment
works in real estate. Again, we’re not lawyers, and this video isn’t intended to be legal advice, so be sure to talk with
a legal professional in your area before you dive
into this strategy any further. For more tips, tricks,
tutorials, and real world guidance on how to crush it
as a real estate investor, come and join us over at retipster.com. (light music)

8 Comments

  • Brooks Lawson

    Its a great video but you make it sound way easier than it is. Finding these properties that sellers are willing to part with at well below market values is the value you provide in this transaction, and that's not an easy thing to do and can cost a great deal of time and money, and also luck.

  • Ben

    A lot of shady unethical wholesalers out there, not being up front with the homeowner that they don't actually have equitable interest. In other words – they're cowards because they think transparency will kill the deal. It will not. Up. Front. Always.

  • andrew barahona

    Sorry but your incorrect wholesaling is completely legal in all 50 states as long as you say you selling your contract not the house

  • BrickFilmerPower

    Nice video. If a closing agent handles both the Purchase and Assignment Agreements, then am I free from legal action?

    Thanks

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