What Is Assignment of Contract in Real Estate Investing?

In the world of real estate investing, there are various strategies that investors employ to maximize their returns and minimize risks. One such strategy is the assignment of contract, which allows investors to transfer their rights and obligations under a real estate contract to another party.

What is an Assignment of Contract?

An assignment of contract is a legal agreement that allows an investor (the assignor) to transfer their rights and obligations under a real estate contract to another party (the assignee). This means that the assignor can effectively sell their position in the contract to the assignee, who then steps into the assignor’s shoes and assumes all contractual rights and responsibilities.

Typically, the assignor is a real estate investor who has entered into a purchase agreement with a seller. However, for various reasons, the assignor may decide to assign their rights to another investor or buyer before the closing of the transaction.

How Does the Assignment of Contract Work?

Let’s say a wholesale investor, John, signs a purchase agreement with a seller to buy a property for $100,000. Before the closing date, John finds another investor, Sarah, who is interested in purchasing the property for $110,000. Instead of going through with the purchase himself, John decides to assign his contract to Sarah.

John and Sarah then enter into an assignment agreement, which outlines the terms of the assignment. This agreement states that John is transferring his rights and obligations under the original purchase agreement to Sarah. It also specifies the assignment fee, which is the amount Sarah will pay John for the assignment.

Once the assignment agreement is signed, Sarah becomes the assignee and assumes all of John’s rights and responsibilities under the original purchase agreement. This means that Sarah will be the one to close the transaction with the seller and pay the agreed-upon purchase price of $100,000.

In this scenario, John makes a profit of $10,000 ($110,000 – $100,000) without ever owning the property. Sarah, on the other hand, gains the opportunity to purchase the property at a price she finds favorable.

Benefits of the Assignment of Contract

The assignment of contract can be a beneficial strategy for real estate investors for several reasons:

1. Flexibility: Assigning a contract allows investors to profit from a deal without having to go through with the purchase themselves. This flexibility allows investors to leverage their time and resources more effectively.

2. Reduced Risk: By assigning a contract, investors can avoid the financial risks associated with owning and maintaining a property. They can also minimize the risks of market fluctuations and unforeseen expenses.

3. Profit Potential: Assigning a contract can provide investors with a quick and relatively low-risk way to make a profit. By finding a buyer willing to pay a higher price than the original purchase agreement, investors can earn an assignment fee.

4. Access to More Deals: The assignment of contract allows investors to participate in more real estate transactions without the need for significant financial resources. This opens up opportunities for investors to expand their portfolios and increase their potential profits.

Legal Considerations

While the assignment of contract can be a lucrative strategy for real estate investors, it is important to consider the legal aspects involved:

Contractual Obligations: The assignee assumes all the rights and obligations of the original contract. It is crucial to thoroughly review the terms and conditions of the original contract before entering into an assignment agreement.

Assignment Fee: The assignment fee, also known as the assignment consideration, is the amount paid by the assignee to the assignor for the transfer of the contract. The amount and terms of the assignment fee should be clearly stated in the assignment agreement.

Legal Advice: It is advisable to seek legal counsel to ensure compliance with local laws and regulations regarding the assignment of contracts. Real estate laws can vary from one jurisdiction to another, so it is essential to have a clear understanding of the legal requirements.