What are the advantages and disadvantages of flipping houses through an assignable contract?
Those three little words, "and/or assigns," lead us to one of the most popular strategies in real estate: flipping houses by assigning contracts. Only, is it a good idea? Like any strategy, assignable contracts have their advantages and disadvantages. Thousands of people have made money by using them, but it’s important to understand the ups and downs of the strategy before committing yourself to it. First, let’s talk about the advantages:
The Advantages of Flipping Houses with Assignable Contracts
1) They Don’t Require Any Buying Power
Assigning contracts has one huge advantage. You don’t need any cash or credit to start flipping houses. Theoretically, you can scrape $5 together and and put a $10 million house under contract. You won’t actually close on the property; you’ll assign your contract to an investor for a fee and they’ll close in your place. Fees range, but people have made thousands or millions of dollars from assigning a single contract.
2) They Allow You to Control More Real Estate Investments
Despite their usefulness, cash and credit are not the magic bullet for buying lots of property; your cash will eventually run out and lenders will cap the amount you can borrow at one time. On the other hand, a clever flipper with enough swift investors can do multiple assignment deals at one time. You’re only limited by the number of good deals you can find and the number of investors you have to buy them from you. I know several assignable contract gurus that juggle up to a dozen deals at a time, raking in respectable fees from each of them.
3) They Are an Important Strategy for High-End Deals
Interestingly, assignable contracts can work effectively on higher-end, commercial properties. Buyers typically have more than one LLC and may assign the contract multiple times before closing. Contract periods are also longer, stretching out for months or even years. Because of the extended time available and opportunity from the commonality of the clause, heavyweight investors frequently assign contracts instead of closing on the property themselves. Sometimes, for fees ranging in the millions.
The Disadvantages of Flipping Houses with Assignable Contracts
For a strategy with so many powerful advantages, assignable contracts also have several weighty disadvantages. Before jumping wholeheartedly into flipping houses with them, it’s important that you understand its pitfalls:
1) You’ll Have More Difficulty Convincing Sellers to Give You a Good Deal
Cash and credit give you credibility with sellers. They’re more likely to give you a good deal if they believe you can deliver. For example, most savvy sellers will laugh at you if you offer $5 to bind a contract. They’ll also question your assignment clause and why you need it. So, be prepared to lose deals to people with demonstrable buying power and no strange or confusing clauses in the contract. You’ll need to find sellers that are especially motivated and unable to find any other buyers besides you.
2) You’ll Be Unable to Buy Foreclosures
Most banks have stopped accepting assignable contracts. Not all flippers are always able to assign their contract in time to close, so they have to admit to the bank that they are unable to buy the property. During the contract period, the bank probably removed the property from the market, meaning they have to start marketing from scratch. It’s a horrible situation for the bank. As a result, most have created policies that prevent any buyer from using an assignable contract. They’ve gotten burned too many times.
3) You’ll Have To Rush to Find a Buyer
The typical closing period for a contract is 30 days. So, in less than a month, you’ll need to find a buyer for your contract, give them enough time for due diligence, and allow them to arrange financing, if needed. That’s a lot to do in 30 days. Usually, you’ll need a buyer that can close in cash, eliminating costly delays with conventional financing. In either case, you’ll limit your pool of buyers to those that can act quickly.
4) You’ll Become a Motivated Seller
Because of your time constraints, you’ll also have to price your real estate investment to excite investors. That means cutting your margins. Some investors will attempt to bully you on the price because they’ll see on your contract how much you are making . They’ll also know that you have a small amount of time to assign the contract before it goes dead and you make nothing. You’ll have to accept their offer or walk away empty-handed. Hopefully, you’ll never have to deal with this type of investor, but be prepared for it.
The Bottom Line
Stacked together, those disadvantages look intimidating, but it’s important to keep things in perspective. Assigning contracts is a viable strategy that thousands of people have used to get started in real estate investing. It just takes a little more persistence and creativity. They’re also a gateway to commercial properties, so mastering the strategy when you’re getting started can be a great opportunity.