Real Estate… Answered

My, if this question isn’t controversial! You’ll find diehard believers in both camps. Many investors will tell you that assigning contracts is the only way for truly "creative" investors. Others swear that you need to buy the house and that assigning contracts is an outdated strategy. Who is right?

Like most unsolvable arguments, the truth is it’s not as simple as right and wrong. Each strategy has advantages and disadvantages. Sometimes, it’s best to assign the contract. Other times, it makes more sense to buy the property before flipping it. Knowing when to use each strategy is the key to investing effectively.

Use an Assignable Contract to Flip the House When:

You Have a Large Database of Investors

Once you have a real estate investment under contract, there’s rarely enough time to shop for a retail buyer. If you want to consistently make money from assigning contracts, you’re going to need a database of investors. You can send out an e-mail blast and get back several responses from investors that can close fast. Some flippers also force investors to bid against each other to get the contract, driving up their assignment fees.

You Have Several Months before Closing

Assignable contracts also work well in situations where you have a long time to close. When buying commercial real estate investments, for example, it’s common to push back a closing date six months or even a year to allow for due diligence. Option contracts with motivated sellers have similar timelines. In either case, you can use the extended contract period to shop for a new buyer and assign the contract.

You Have Insufficient Buying Power to Close

Sometimes, you sign a contract knowing you can’t close but hoping you can flip the house fast. You might also think you can close but something happens before the closing date that prevents you. In either situation, assigning the contract is your best choice. Otherwise, you’ll probably have to default on your contract or use a contingency clause, making no money and wasting time.

You Have Only a Mediocre Amount of Equity

Through experience, I’ve learned that people get greedy when there’s a lot of equity on the table. If you’re in a situation where you can’t close, you give investors at a lot of leverage over you. They can either give you peanuts for the assignment fee or wait until your contract terminates and scoop it up without paying you a dime. Interestingly, this doesn’t happen as much when you have only a mediocre amount of equity. Investors will pay you without much of a fuss.

You Have a Seller That Will Allow the Assignment Clause

After seeing lots of deals fall through, many realtors are starting to refuse assignment clauses in contracts. Almost every bank has a policy against them. So, if you’re lucky enough to find a seller that will allow you to use an assignment clause, take advantage of it. You might even have the funds to close the real estate investment but choose to try an assignment first. If you’re unable to find a quick buyer, you can always revert back to your original plan to close traditionally.

Buy and Then Flip the House When:

You Have No Investors Lined up

If you don’t have a database of investors or no one in your database is interested, then you should forget about assigning the contract. Without buyers lined up in advance, it’s unlikely you’ll be able to assign it in time. Instead, close on the house conventionally and then take your time looking for a buyer.

You Have to Close Immediately

Most sellers will give you no longer than 30 days to close. While it’s possible to successfully assign a contract in only a month, it’s difficult to both find a buyer and give them adequate time to pull their money and financing in order. You might find it easier to close on the property and give your investors a few extra weeks to buy the real estate investment from you.

You Have the Money to Close

When you’re broke, the only way to flip houses is assigning contracts, but if you have a little dough, you might consider buying the house before you flip it. You’ll have more leverage with investors and you’ll make it easier for the investor to pay you. Where you cannot finance assignment fees, you can finance an increased purchase price.

For example, if you contract a house for $60,000 and assign the contract for a $5,000 fee, the investor has to pay you $5,000 cash from their own pocket. On the other hand, if you buy the house for $60,000 and sell it for $65,000, the investor can finance the extra $5,000, reducing their total out-of-pocket expenses. The financing makes it a better deal for them.

You Have a Large Amount of Equity

You can avoid power plays from greedy investors by owning the property. For example, if you put a property under contract for $50,000 and it’s immediately worth $100,000, investors might try to gobble up all of that equity for the same old $5,000 assignment fee. By owning the property for $50,000, you have absolute control over the sales price, allowing you to negotiate an extra $15,000 or more of profit.

You Have a Seller That Wants a Tight Contract

Frequently, you’ll find a great deal with an educated seller. For example, banks know the assignment game and they refuse to sign any loose contracts that allow you to flip before closing or escape from the contract. Some motivated sellers are just as picky about their contracts. In these situations, it’s worth signing a tight contract and closing traditionally in order to get a great real estate investment.