When most people think of flipping real estate, they imagine the classic “buy-fix-market-sell” business model, in which the flipper keeps ownership of the house from the word “go” until he’s handing a young couple the keys, and they live happily ever after in their dream home with the shale shower and the granite countertops.
Well, that’s one way to do it. (I’m usually skeptical of the luxury renovations, from an ROI perspective, unless you’re just bringing a house into parity with other houses in the neighborhood.) But there’s another model as well.
You don’t have to keep the house through the whole process. Indeed, it’s quite common for a flipper to find a bargain, enter into a contract to purchase the property, and then sell the contract to a more experienced investor through a concept called “assignation,” or “assigning.” This concept is, indeed, part and parcel of the wholesale business model.
Wholesaling via Contract Assignment vs. “Bird-Dogging”
This is a step above the bird-dog model, in which all you do is find the deal and your upstream investor handles everything after that. He can even close the deal with a profit margin much less than anticipated – which means your finder’s fee could be less than you expected as well, when the deal is done.
With a contract assignment, on the other hand, you have much more control: You don’t have to give anyone else the deal until after you’ve gotten what you want out of it. But you also assume much more risk: Once you enter into a purchase agreement, if you can’t find a buyer to take it off your hands, you have to go through with it. You have to come up with the money to purchase it within the agreed-upon time frame. You also are taking on the responsibility for any existing liens on the property as well as property taxes and insurance.
It follows, then, that you should be able to get a bit more profit out of a contract assignment than out of a pure “bird-dog” arrangement.
A contract is a legal document. Assignment transactions are legal transactions governed primarily by state law. It’s pretty straightforward stuff for an attorney. But if you’re not an attorney, you should definitely invest in getting an attorney to write up an assignment contract for you.
Good attorneys are skilled at coming up with a whole bunch of different contingencies that don’t occur to lay people. The contract should specify what happens when the transaction occurs as agreed, what happens if there’s a snag on the seller’s end, and what happens if there’s a snag on the buyer’s end – including what happens if the buyer fails to secure financing to execute the deal.
In an ideal world, you can simply enter into a purchase agreement stating that you or your assignee will purchase a property for X dollars not later than a certain date.
In the real world, it’s a little trickier than that. What happens if you are a well-qualified buyer with easy access to financing or ample liquidity to make a cash purchase if you wanted to, but you assign it to someone who can’t make the deal happen? Are you still obligated to see that the property is purchased? After all, you made the deal with the seller. If the seller was harmed because the deal didn’t happen as agreed, does the seller have legal recourse against you?
That depends on state law and precedent. That’s where an attorney can come in and guide you through the risks particular to your state.
In Florida, you get a choice:
- You can check the box that indicates that the buyer “may assign and thereby be released from any further liability under this Contract.”
- You can check the box that indicates that the buyer “may assign but not be released from liability under this contract.”
- Or, you can check the box that says the buyer “may not assign this contract.”
As a buyer/wholesaler, you want to check the first box.
As the seller, you would want to check the second box. This gives the buyer enough flexibility to make sure the deal goes through if he hits a personal snag. But it doesn’t let the buyer off the hook.
Obviously, rules in your state may vary. That’s why I am an advocate of getting an experienced attorney licensed in your state to look over any documents being assigned.
The conflict of interest here between the buyer and seller creates a negotiation opportunity, in practice. If your counterparty wants to check the box most favorable to themselves, you might ask for some compensation in exchange.
If you want to be able to assign a contract to purchase real estate, in the space after your name, write the words “and/or assigns.”
If the laws in your area will not let you assign a contract unless you retain liability for your assignee’s failure to execute the terms of the contract, consider creating a corporation or LLC to purchase the property. Instead of assigning the contract directly, your upstream buyer just purchases the corporation from you. The entity has the obligation, not you, and retains the obligation no matter the ownership. All liabilities go with the corporation, too.
If you don’t have a real estate license, be sure to structure the deal to make it clear that you are selling the contract, for consideration, rather than the home itself for a “finder’s fee.” If you are finding properties and recommending them for other investors, you might need to have a real estate license.
Build in a waiting period or an “inspection period” to hedge your bets. You’ll probably need to put up some earnest money as a deposit to hold the property. But that gives you some time to call up your extensive network of fellow real estate investors to tell them you have a profitable deal that might work for them. If you can’t find a buyer, your option is to simply buy the property yourself and flip it normally, or cancel the deal and forfeit your deposit – sometimes less than $100, and as real estate investor Lex Levinrad has seen them, as low as $10.
The course of action you choose will depend on your personal situation, liquidity and risk tolerance.