There are several ways to invest in real estate beyond the well-known methods of buying rental properties or fixing and flipping houses. One interesting, and potentially lucrative, way to make money in real estate is by wholesaling properties. This essentially means that you find real estate deals that you don’t actually intend to buy but plan to transfer to another buyer. In order to do this, you need to use a legal principle known as assignment of contract.
With that in mind, here's what assignment of contract means and how you can use it to profit from real estate deals without having to put up any of your own capital to acquire a property.
What is an assignment of contract?
Assignment of contract occurs when a party to an existing contract transfers the contract's legal obligations to another party. As a basic example of an assignment of contract, if you sign a contract with a landscaping company to mow your lawn every two weeks and the landscaping company assigns your contract to another company in the area, the new company is assuming the obligations (mowing your lawn) and benefits (collecting payment) of the contract.
Now, depending on the language in the original contract, such a change may not be allowed -- at least not without your consent. Some contracts prohibit assignment altogether. Others allow assignment of contract, but only if the other party to the contract (you, in the landscaping example) agrees to the change.
Assignment of contract as a real estate investment strategy
One real estate investment strategy that has gained popularity in recent years is known as wholesaling. This strategy involves an investor (wholesaler) negotiating a purchase contract with a seller and subsequently assigning that real estate contract to a buyer, collecting an assignment fee for their efforts. This is also known as flipping real estate contracts.
Here's a key point about real estate purchase contracts: A real estate contract isn't necessarily an obligation for a particular individual to purchase a home. Rather, it gives the individual the right to buy that particular home, but that right can be sold to another purchaser if the terms of the contract allow it.
As an example, let's say that I'm a real estate investor and want to find bargain-priced properties that are going to produce excellent cash flow. The only problem is that I don't have the time or the negotiation skills to find the truly good deals. However, by working with real estate wholesalers, I can be assigned a contract that was previously agreed upon in exchange for a fee.
How does real estate wholesaling work?
The main idea behind real estate wholesaling is simple. First, you find a property whose seller is willing to accept significantly less than market value in exchange for a quick and easy sale. Then, you find another buyer who is willing to pay slightly more than the contract price, and you assign the contract to them and profit from the difference. Of course, this is easier said than done.
Real estate wholesalers use several techniques to find properties for sale. Many use direct mailers, market their willingness to buy houses online, place newspaper ads, and use other strategies to find sellers. Most use a combination of several strategies to give themselves the best chance of successfully finding a deal. For example, if you've ever seen a sign about buying ugly houses in your town, it was probably placed there by a wholesaler.
For the business model to work, a wholesaler needs to target situations where a homeowner needs to sell their home as quickly as possible. Maybe the house needs repairs that they aren't willing to make, but they need to move out of state for a new job. Or maybe they are behind in their mortgage payments and selling quickly could help get them back on their feet financially. The point is that these situations generally take quite a bit of work to find.
Once a seller is located and a price is agreed upon, the wholesaler will use a real estate assignment contract to finalize the purchase agreement, and they will make clear to the seller that the contract may be assigned to another buyer before the agreed-upon closing date. The wholesaler then submits the contract for a title search (and likely has an attorney take a look at it), and as long as the title search is clear, the wholesaler will then try to find an end buyer for the property.