contract assigment question - Posted by Heather

Posted by JohnBoy on February 26, 2002 at 15:21:18:

If he looks at the property and decides to take his chances by waiting until your contract with the seller expires, sure he can do that, BUT, before your contract expires you could sell it to a number of different investors before then. You don’t stop marketing the property until after you have a signed deal with a buyer and have his non-refundable earnest money up front! If your property is being offered at a DEAL then you will have more than one investor standing in line wanting to buy!

contract assigment question - Posted by Heather

Posted by Heather on February 25, 2002 at 16:32:31:

Hi all,

When doing a wholesale flip to a REI/rehabber how do you structure it so that the potential REI/rehabber simply just doesn’t wait until your purchase agreement runs out and “going behind your back” to aviod paying you for the assignment?


Re: contract assigment question - Posted by JohnBoy

Posted by JohnBoy on February 25, 2002 at 18:15:00:

You have the investor put up your profit amount as non-refundable earnest money, subject to only getting clear title to the property. Then whether the investor closes or not you get paid your profit! If they won’t put up enough as non-refundable earnest deposit then they aren’t serious. Find another buyer that is serious!

JB 1 more quick question - Posted by Heather

Posted by Heather on February 26, 2002 at 09:34:54:

OK, I understand what you were saying about the non-refundable earnest money/assigment fee. But do the REI’s typically want to see the house before putting up the $. I would tend to think they would and that would provide them with all the info they need to wait until my contract with the seller ran out. After they have that info - if I were them I would wait it out - wouldn’t I? Or should I take pic’s and try to sell them on the pic’s? I guess I’m nervous b/c the house is listed on MLS and once I say what neighborhood it’s in they will imediately be able to find it.
Also, the asking price is 104k, after rehab the ARV should be around 160K based on the area comps. Needs about 15k in rehab. What would be a good offer to the seller and then what do you think would be a good assignment fee.
Oh one more thing, is it called “earnest money” or “assignement fee” or are they one in the same?
Sorry so long - didn’t realize I would start jabbering once I got started :slight_smile:
Thanks again for all your help!!!

Re: contract assigment question - Posted by Shawn (OR)

Posted by Shawn (OR) on February 26, 2002 at 24:01:13:

Let me make sure I understand what you’re saying, JohnBoy. So I find a property I want to flip and make my offer and tell the seller I’m willing to put down $500 in earnest money. I then find my buyer and ask them for non-refundable earnest money (which will be my profit.) I want to make $3000 so that’s what I ask from my buyer.

Do I then turn around and hand $500 over to the original seller and fill out the assignment of contract form. Keep my $2500 and go about my merry way?

Re: JB 1 more quick question - Posted by JohnBoy

Posted by JohnBoy on February 26, 2002 at 10:28:15:

You will have to let the investor inspect the property. There is no way around this. They need to see the property so they can determine what it will cost them to rehab based on their own criteria. No one is going to commit to an offer without seeing the property first. They can try and wait it out until your contract expires, but meanwhile you’ll just sell it to someone else! This is why you don’t tie the property up under contract with an investor unless they put up all your assignment fee up front as non-refundable earnest money. It’s called an assignment fee. Some investors will just pay you your assignment fee and take your contract and show up at closing to close on the sale. Some will want to wait until the closing before paying you anything. If they want to wait until closing then you would want to require they put up whatever your assignment fee would be as non-refundable earnest money to be held in an escrow account by your attorney or the title company with written instructions that that money is to be released to you upon closing or if the buyer backs out for any reason, other than being able to get clear title to the property. That way you prevent the problem of having the property tied up with someone while they just wait it out until your contract expires with the seller to try and go around you.

On a property worth $160k ARV I would estimate a $25k profit that any investor you flip to would want to make out of this.

So you would need to figure in the $25k profit for the investor, the $15k for repairs, up to six months of holding costs, and 6% commission for a realtor to resell the property for the investor. Then figure in your profit you want to make. Add all that up and deduct from the $160k and that would be the maximum price you could offer to pay for the property.

$25k profit for investor
$15k for repairs
$4800 for errors in repair costs (3%)
$9600 for realtor commission to resell
$6000 for holding costs up to six months
$5000 for your profit

Total costs = $65,400

$160k - $65,400 = $94,600 MAXIMUM purchase price!

So I would offer $80k leaving room to come up some with a counter offer.

If you get an offer excepted then I wouldn’t say what I wanted for an assignment fee to the investor your going to flip to. Instead I would show them the property and let them make me an offer as to what they will pay me for the property first! You never know, they may offer more than what you expected them to pay and could make a larger profit!

If they offer you a good price to where you stood to make a sizable profit on this then don’t fool with trying to assign your contract. Instead, write up a new purchase agreement between you and the investor for the price he is willing to pay and set up a simultaneous closing. That way your investor won’t know how much you stand to make on this for just flipping your contract to him. If they know how much you would be making they may try to cut you down more on the price because they may think you would be making to much profit for just flipping your contract.

Then at the closing the title company would take the funds your investor brings to closing and out of that they would pay off your seller for the amount you agreed to pay them. Then whatever was left over the title company would pay you the difference! Neither the seller or the investor would know what you were making off the deal! You would just take your contracts to a title company and tell them you will be doing a simultaneous closing between your seller and your buyer. They will know how to handle setting this up for you. If you get a title company that says they can’t do that, then find another title company that does do these.

If you use an attorney he/she should know how to take care of this for you. For a few hundred bucks it would be worth it to insure everything goes smoothly since you’ve never done this before. Then after you do the first one you will have a better understanding of the process involved and you can handle the next one on your own or continue to use an attorney if you feel more comfortable doing that.

If you do end up doing a simultaneous closing make sure you get as much as you can from your investor to be held in escrow as non-refundable earnest deposit. I would want at least $5k put up to show he’s a serious buyer. Make sure the earnest money is held by YOUR attorney or the title company with written instructions that the earnest money is to be released to YOU if your buyer doesn’t close for any reason other than getting clear title. If your buyer balks over this they find another buyer that is serious about buying the property! This prevents anyone from trying to go around you and deal with the seller directly!

Re: contract assigment question - Posted by JohnBoy

Posted by JohnBoy on February 26, 2002 at 10:29:27:

If you have to pay the seller any earnest money then you will have to pay that at the time you enter into contract with the seller. I only put up a $100 at most IF I have to. Otherwise $10 is all I give!

Then you find a buyer to sell the property to. Depending on the amount of your profit would depend on how you handle it. If you stand to make a few thousand then you would just have the investor pay you that up front as an assignment fee and let them take over your contract.

If you stand to make a larger profit where you didn’t want the investor to know how much you were making then you would enter into a separate purchase agreement with your buyer and set up a simultaneous closing between your seller, you and your buyer in order keep your buyer from knowing how much profit you were making. Just make sure you get a sizable amount up front from your buyer as non-refundable earnest deposit to prevent your buyer from trying to stall by dragging out the closing until the last minute so he could go around you once your contract expires with the seller and deal directly with them by cutting you out of the deal! This way you get paid no matter what!

Re: contract assigment question - Posted by Steve-DC

Posted by Steve-DC on February 26, 2002 at 07:41:05:

As well,

You may run into a case where your buyer doesn’t have your entire assignment fee in cash. In that case, you can get enough from him to cover the earnest money deposit, some more as a “consideration”, and the rest when he closes. Just write it into your assignment clause that he/she is paying you X toward the fee, with the rest due at closing.


Re: contract assigment question - Posted by JoeS

Posted by JoeS on February 26, 2002 at 07:27:29:

JB is right. Yes, if you are selling the contract for 3k, you would get the 3k upfront from the contract buyer. Whatever you give the seller as earnest money is whatever was agreed upon.

Re: JB 1 more quick question - Posted by Shawn (OR)

Posted by Shawn (OR) on February 26, 2002 at 13:43:49:

A question about simultaneous closings: Does it matter in which order the closes happen? I’ve heard everyone isn’t present at once, but it seems a Catch-22 situation. If I close with the seller first I don’t have the cash, if I close with the buyer first I don’t have the deed. Does this not matter as long as it is all rectified within a certain period of time?

Re: contract assigment question - Posted by ann

Posted by ann on February 26, 2002 at 13:54:49:


Suppose your potential buyer, instead of entering into a contract with you, thereby being obligated to pay you a fee, were to tell you he’s not interested in the property after having looked at it. Couldn’t he then wait for your contract to expire and contact the seller himself?

BTW, JohnBoy, I want to extend my thanks to you for the time and effort you put into answering everyone’s questions. You are a credit to this community.


Re: JB 1 more quick question - Posted by JohnBoy

Posted by JohnBoy on February 26, 2002 at 15:23:41:

Everyone could be present at once where you close in separate rooms or the closing could take place on different days or even at different title companies. The title company will hold everything until they have all the docs in order from all sides involved.