Real Estate Investing: The Assignment of Contract Process
Updated: Feb 26, 2019
So I am sure if you made it to this blog post, you are interested in the business of wholesaling. Real estate wholesaling is a very interesting and intriguing business model that can be very profitable if executed properly. Several newbie investors get into real estate wholesaling because there is a low barrier of entry and they believe that there are little upfront costs to get started.
Wholesaling real estate is the process of marketing to find distressed/discounted real estate, placing the property under contract and either assigning your contract to another buyer for a fee or double closing on the property and reselling the property to another buyer for a profit.
The business model of real estate wholesaling has very little to do with real estate in general and is a pure marketing and sales business. If your business has the systems in place and you have the knowledge to find deeply discounted properties at a consistent basis, you have an opportunity to profit on your skill.
In this post, we would like to discuss the details from contracting a property with intention to wholesale to the closing on the deal. We are going to talk from pure experience as to how we successfully execute our deals and consistently grab wholesale fees on a weekly/monthly basis.
Steps to Successfully Assign And Complete A Wholesale Deal
The best way to explain the wholesale process in our opinion is to go through the steps to successfully get to closing to collect your wholesale fee because we all know that we do not collect revenue until the transaction is completed.
1) Original Purchase Contract - As a wholesaler, we need to make sure that are using a standard purchase contract agreement that be legally utilized to purchase real estate in our state. Within this original purchase contract, we need to add a bullet point called Assignment. Within this bullet point, it will state "This contract is assignable to another buyer. If the contract is assigned to another buyer, that buyer will not have the right to conduct a home inspection prior to closing". While we do allow additional due diligence from our buyer prior to contract close, we do not want our buyer to utilize the "Home Inspection" period within our original purchase contract as a way to back out of the deal. Once we have done our property analysis and determined a good purchase price to contract the deal at, we will utilize our original purchase contract to put the seller under contract. An additional bullet point that you should add to your original contract is "The buyer has the ability to market the property to its clients during the inspection period, both online and by walk-throughs with reasonable notice given to the seller". This language is needed because as wholesaler's, we want to be upfront and honest with the sellers that our intention is to resell the contract to the property and that we will be marketing the property on different platforms. Early on in our wholesaling career, we were not always upfront and honest with our clients and they would see the contract for sale on social medium platforms and would just cause additional confusion for the seller. As a wholesaler ALWAYS be upfront and honest with your intentions, it is always better.
2) Marketing to Cash Buyers - The other side of the wholesaling business besides being able to market to find deeply discounted properties, is our ability create a buyers list of legitimate cash buyers in our area to assign our contracts too. There are an abundance of different ways to get potential buyers information and add them to your list. When operating a wholesale business, you will want to continuously market to find more cash buyers and utilize and email platform such as MailChimp to add your buyers to so you can send out email blasts when deals are contracted. To get in front of potential buyers, you can also utilize platforms such as Craiglist, Text Blasts, Phone Calls, Facebook, LinkedIn and other social media platforms to get your product the necessary exposure needed to sell the contract. Once you have the property under contract and an understanding established with the seller, you will create a template/campaign on MailChimp with all of the properties vital information to send out to your buyers. Below is an example of the template that we use to send out to our cash buyers.
3) Showings / Open House - As a real estate investor, you are going to want a chance to put your eyes on the property and do your own due diligence on the property. As a real estate wholesaler, part of your job description will be to schedule and coordinate open houses and showings for your interested cash buyers to intend. This will give them the time needed to do their own due diligence, run their numbers and see if the property works for them. As you begin to scale and add to your buyers list, you will be able to schedule an open house a couple day's out to get as many potential buyers there as possible. If the property does not sell after the first open house, you may need to re-evaluate your offering price (if you had a good showing, with no offers) or you can schedule another open house or just do 1-off showings to interested parties.
4) Letter of Intent - All the interested cash buyers will need a way to submit a purchase price to you. In our business, we utilize an initial letter of intent to gather all purchase offers. The reason that we utilize a letter of intent and do not have our buyers submit there own purchase contracts is because if you let the buyers submit their own purchase contracts, they are under the belief that they will be getting the terms of the deal that they submitted. We have a simple letter of intent, we have our buyers use to submit with any major additional information that they would need to know about which is contained in the original purchase contract, such as "the buyer will be responsible for the payment of the seller's closing costs". Once you have gathered all of the letter of intents from interested buyers, it is now time for you to make a decision on the best buyer based on the offer price as well as how comfortable you are with their ability to close.
5) Assignment Contract - Once you have made a decision on the buyer that you will be choosing to assign your contract to, you will then send over the assignment contract. This assignment contract will essentially hand off the assignor's (you) obligations and benefits to another party (assignee). The assignee will be stepping into the shoes and assume all of his contractual obligations and rights that you have with the seller. Below is an example of the assignment contract that we use and assemble for our cash buyers. This assignment contract is to be sent to the buyer to be signed and returned.
6) Earnest Money Deposit - Once the assignment contract is signed and returned, in order to make the deal binding, you will have to collect an earnest money deposit from the buyer. This will prove that the buyer is serious and committed to the deal. This protects both you, as the "assignor" and the seller. We typically require EMD, anywhere from 2k-5k depending on the size of the deal and the assignment. This EMD check should be made out to your attorney and held in escrow until closing. You should always relay to your buyers that if the deal falls through because of your or the seller, then the EMD will be returned. If the deal falls through because of the buyer, the EMD will not be refundable.
7) Disposition Introduction Email - Once the assignment contract is returned, it is your responsibility as the wholesaler to get all parties on the same page with the transaction. Something that we like to do is to send out an introduction email to all parties involved in the deal, letting them know that the contract has been assigned and to relay all vital information on the deal, such as:
Seller's Attorney Information
Buyer's Attorney Information
Title docs can/should begin being updated
8) Disposition Follow Up - As the wholesaler, it is your responsibility to ensure that the deal makes it to closing with no hiccups. You will be acting as the middle man for the deal between the seller and buyer and thus answering questions from both parties as the deal is in with attorney's. We need to make sure that the title is clear and relay this information to both the buyers and sellers. We also have to do whatever is needed in order to ensure that the deal closes, since we need to do whatever is best for the seller.
9) Closing & Collection - In about 2-3 weeks from the time the property is assigned, you can expect a closing. In some market's you can expect a faster closing but in our market, this is the general amount of time it takes to update title and schedule a cash closing. Once the closing is complete, you will either be able to pick up the check from your attorney's office or get the check wired into your bank account.
We hope this blog post gave you some detailed information into how the process works from purchase contract to closing. As wholesalers, we know that a deal can fall apart at any given time so it is very important to be transparent and to have all parties involved throughout the transaction. If you guys have any additional questions about the wholesaling process, we would love to help answer them. Feel free to reach out to us at firstname.lastname@example.org and we will help in anyway possible.