An assignment clause in a real estate contract allows an investor to sell a property without buying it. There is a lot to unpack in that simple sentence, so let us examine why a seller, an investor (or wholesaler), and a buyer may want to enter into such an agreement.
- An assignment clause in real estate allows an intermediary to grant the privileges and responsibilities of a contract to another person.
- People make money assigning contracts by brokering deals between motivated sellers and dependable investors.
There is a lot of legwork that goes into finding appropriate properties. However, the transactions themselves usually happen very quickly.
How Does an Assignment of Contract Work?
What does assignment mean in a contract? An assignment grants the benefits and responsibilities of a contract from one party to another. Investors use these contracts to ensure they get paid when they broker real estate deals.1
What is an Assignment Clause in a Real Estate Contract?
The assignment clause in a real estate contract is the vehicle that allows wholesalers, or intermediaries, to broker deals in real estate. There are three important parties in the clause:
- The assignor – The seller
- The obligor – The investor or wholesaler
- The assignee – The buyer
This allows the obligor to be a legal party to the contract. It allows compensation for the investor (the obligor), who acts as the middleman.
What if There is No Assignment Clause in a Real Estate Contract?
Can you assign a contract without an assignment clause? Most of the time yes. In most states, if the contract does not specifically forbid it then a buyer may assign the contract to another buyer. However, be careful. If you do not include the clause in the sales contract, then you should draft a contract stipulating your assignment fees with the new buyer.
Difference Between Assignment and Novation
The difference between an assignment and a novation is subtle but important. With an assignment, the obligor transfers the benefits and obligations of the existing contract to a third party. No change is made to the contract. In the case of a novation, the investor substitutes one buyer for another.
To novate a contract, the assignor (the seller) must agree to a change in the contract. That is not necessarily true in the case of assignment. The 0bligor may assign an assignee (the new buyer) and not make any changes to the contract.
How do You Make Money Assigning Real Estate Contracts?
This real estate investment strategy works when you broker a deal between a motivated seller and an investor. It is a niche market that requires you, as the broker, to find the right seller and match them with an appropriate buyer. But what kind of seller? And what kind of buyer?2
What Sellers You Should Approach with an Assignment Contract
Not every seller is interested in this type of transaction. Finding the right seller of an appropriate property is crucial. You must find a motivated seller who thinks it is more important to sell quickly than get the most money.
This is a proactive process. You must find them before they find another interested buyer or broker. Here are some ways brokers find these buyers:
- Email marketing
- Direct mail marketing
- Radio ads
- Putting out signs in a target neighborhood
With this campaign, you look for the seller who tells you “I have to sell because . . .” as opposed to “I’m curious about what my house may be worth.”
What Buyers You Should Approach with an Assignment Contract
When you find a motivated buyer, who wants to sell an appropriate property it is important to already have an interested seller or sellers, you can call. If you do not have a dependable buyer ready to go you will lose the deal, because someone else will buy. What does a good buyer look like in this case?
- Someone with experience buying investment properties.
- Someone who can close quickly.
- A professional who is consistent and decisive.
The buyer must act quickly. This means they pay cash or have financing lined up ahead of time and can close quickly. Indecisive people will either not act quick enough or get cold feet and back out of the deal. In the latter case that could leave you in a precarious position. You either must buy the property yourself or forfeit your earnest money.
The best thing to do is find an investor you trust before you find a motivated seller. Going to investing chat rooms is a good place to start if you do not know anyone personally.
Final Thoughts on An Assignment Clause in a Real Estate Contract
Assignment contracts may seem like an easy investment strategy on the surface, but it requires a lot of research. You must know real estate values in your area very well and be willing to do a lot of legwork finding undervalued properties with motivated sellers. That is not easy, and there is a lot of competition.
On the other side of the transaction, you must cultivate a stable of reliable investors. This takes even longer because you must develop trust with them. You must trust them to complete the transaction, and they must trust you to find them good investments. One bad deal can sour a relationship. Also, not every investor is ready when you find a property, so you must gather a stable of investors so that one will be ready when you call with a hot deal.