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Assigning a Real Estate Contract For Wholesale

Experienced real estate investors always talk about how easy it is to go about assigning a real estate contract. However, they always seem to gloss over the necessaries of actually doing this in real life. Assigning a real estate contract seems like an easy move, but the new wholesaling investor can find the idea is confusing. After all, how can you assign a contract when you don’t even know what to do to accomplish it?

Assigning a Real Estate Contract is Simple
Perhaps the reason that so many real estate investors don’t delve into assigning a real estate contract, is because it’s so simple. They just forget about the topic in the larger scheme of real estate wholesaling.

You’ll be surprised at how easy it really is to assign a contract to a buyer. Assigning a real estate contract is ‘giving up’ your right to purchase a piece of real estate by selling that right to another investor, your buyer. The contract that you assign is the original purchase agreement that the homeowner signs with you.

You may be worried that you’ll have a hard time getting your hands on the documents and contracts required to wholesale a property. There are plenty of places to get purchase agreements and the other necessary documents for a real estate transaction online. These documents are perfectly legal. Just be sure to read over them to make sure you understand what they say. A contract doesn’t need difficult languqge to make a legally binding real estate document.

When you actually assign that contract you’ll write in the buyer’s name on the original purchase agreement. The buyer’s name will be placed in the ‘and/or ASSIGNS’ sections, which you can either write in when first signing the document or create a document with a specific section for the ‘assigns to’ section. The buyer then signs his or her name on the purchase agreement.

It’s your responsibility to get that a copy of the assignment contract to the title company for the escrow process. This way they know that you’ve assigned the contract and can complete title change.

What’s Involved in Assigning a Contract?
You’ll make a few adjustments to the contract as you are signing it with the homeowner. Begin by adding the phrase, ‘and/or ASSIGNS’ after all the spaces where you, the buyer, sign your name on the contract. Also include a small section in the contract stating you are allowed to assign your rights to this purchase agreement to another buyer. Of course, if you look around, you can also find contracts that already include the ‘and/or ASSIGNS’ sections.

You’ll also need the ‘assignment contract’ to finish assigning a real estate contract. The assignment contract is the legal document between you and the buyer stating that you’ve agreed to give up your rights to the homeowner’s purchase agreement in exchange for a fee.

You should also be able to find this document on the web. It’s not difficult to write up if you can’t a copy of it online. Write the document stating that you agree to give up rights to the purchase agreement for the property at a certain address. Be sure to state:

– your full name,
– the homeowner’s name,
– the property price and
– the property address in your assignment contract.

Also list the fee you’ll receive from the buyer in exchange for your rights to the agreement to buy contract. When creating this document make sure to include; the dates, your signatures and a space for the notary to sign and validate the assignment contract.

Assigning a real estate contract is not difficult. You just need to learn the process once, and from there will be able to repeat it. Investors can assign a contract in real estate wholesaling, short sales and even the purchase of a home at full market value.

Real Estate Contracts Determine the Success Or Failure of Your Real Estate Business

Let me first state that I am not an attorney and nothing I write or say should be considered legal advice. Please contact an attorney before making any legal decisions.

When doing any type of real estate investment deal it is critical that you have quality real estate contracts. Whether you are investing in foreclosures, buying out of bankruptcy or any of the other dozens of real estate investment strategies, quality real estate contracts play an important role in your success.

Quality real estate contracts will help to ensure that you, the real estate investor, are fully protected within the confines of the law. You want real estate contracts that will protect yourself and your business to the highest degree whether you are the buyer or the seller.

If you are the buyer you want to use real estate contracts that will allow you to easily walk away from the deal if necessary while at the same time offer the stiffest penalties if your seller should decide to walk away. And the converse is true when you are the seller.

There are certain real estate contract clauses which will allow you to do this when used correctly. You can use inspection clauses, mortgage contingency clauses, appraisal clauses, default clauses…the list can go on and on. The important thing to remember when using these clauses is that you use them correctly.

You need to make sure that your “Defined Terms” are congruent throughout your real estate contracts.

You need to make sure that the contracts that you use do not conflict.

The real estate contracts that you use will directly effect the success or failure of your real estate business because they can either protect you from lawsuit or leave you open to folks who would rather sue you to get rich than work hard themselves…not to mention that your real estate contracts can determine the success or failure on a deal to deal basis.

I would recommend that you use contracts that come from one source because real estate contracts that come from one source can help to eliminate the problems above and much more.

Whether you get your contracts from your attorney, a book, a guru, or a program such as the REIFormsGenerator it is important that they come from one source and you always have your real estate contracts reviewed by an attorney in your investment state.

Eight Basics of a Real Estate Contract

Real Estate Contract, or Land Contracts or Contract for Deed, can be a good tool for real estate investors to receive higher income (usually higher than rental income by around 30% to 70%) for a few years during the term of the contract.

One of the main disadvantages of Real Estate Contract compare with the “Long Term Lease To Own” is that the sale price is set, most of the time, at current market value without giving much time for the real estate investors to ride out of this real estate recession. However, depending on the interest the buyer is willing to pay (the *spread* in the case of wrap around mortgage) and reduced or eliminated payment of property tax and insurance, the investors can expect sizable cash flow each month, which should compensate the loss of potential capital appreciation. One caveat to this strategy is buyer’s ability to *pre-pay* the mortgage. See below for more discussion.

Real Estate Contract are common in some states, they are called Land Contracts, or Contract for Deed, but they all represent the same thing: a way of selling property where the buyer “borrows” from the seller for the financing rather than borrowing from a bank.

Within an agreed number of years, it is expected the buyer will be able to qualify for a loan. At that time, they will obtain a new mortgage and pay off whatever amount the land contract requires. Real Estate contracts vary widely from transaction to transaction, however the basics of the contracts usually are:

1. Seller retains legal title and the Buyer receives equitable title

The buyer will not receive the Deed to the property until the full amount the seller financed is paid in full. The seller remains the title holder while the buyer is making payments. The transfer of legal title is always done by a separate deed of conveyance, usually a warranty deed, which is placed in escrow when the contract is signed.

The contract does transfer an interest to the buyer, known as the “equitable title”. The buyer signs a special warranty deed which is placed in escrow together with the seller’s warranty deed. The seller can recover equitable title from the buyer in the event of buyer defaults by giving appropriate notices (typically 30 days) and terminate the contract. It’s a much faster process compare to foreclosure proceeding.

2. Purchase Price often set at current market value

The Purchase price is negotiated between the Seller and the Purchaser. Properties sold on a land contract do not necessary sell for more, because buyer bears great risks to receive all-important owner financing. On the other hand, Owner can usually fairly quickly recover title/deed back from the buyer in the case of Buyer defaults and retains all down payment and paid interests.

3. Down payment

The down payment should be at least 7% to cover closing costs (6% agent commissions and title/escrow fees). The bigger the down payment, the more committed the buyer is and the less likely the buyer will default.

4. Balloon Payment

A balloon payment is the term used for a lump sum, final payment on the contract. Balloon clauses usually call for the final payment to be made on a specified date. If the Purchaser fails to make a balloon payment when required, this will constitute a default on the contract.

5. Interest Rate and Monthly Payment

Usually the owner-financed amount (purchase price minus down payment) is amortized over 30 years payable monthly. The balance remaining will go down each month with the payments made by the Purchaser. Depending on if the seller has a mortgage, the interest rate should be high enough to cover the owner’s monthly payment. We will discuss wrap around mortgage or All-Inclusive Trust Deed (AITD) in the later blog. Typically the interest rate is set 1% to 3% above 30 years mortgage.

6. Taxes and Insurance

Most often the Purchaser is responsible for paying taxes and insurance on the property. The Buyer is required to pay approximately one-twelfth of the estimated taxes and insurance along with each monthly payment to escrow. The escrow then in turn pays for insurance and property tax. This is the safest way to make sure the all-important insurance and property tax are paid.

The insurance policy should be changed from homeowner policy to landlord policy and the beneficiary should remain the seller who holds the legal title throughout the Contract term. The Buyer should maintain his/her own insurance that covers personal property.

7. Defaults

If the Purchaser fails to perform any significant part of the contract, the Seller may have the right, after notifying the Purchaser in writing of the exact nature of the default, to treat all payments already made on the contract as mere rental payments made by the Purchaser. If the default continues, the Seller has the right to declare the remaining balance due and payable, and if the default is not then cleared up or the contract is not paid in full, the Seller can begin steps to regain possession of the property. Improvements made to the property by the Purchaser then become the Seller’s property.

8. Pre-payment Provision

For real estate investors who like to receive positive cash flow to compensate for the sale of the property at current market value, be very careful that the buyer typically is allowed to make early payments to reduce the principal, hence reducing the interest you can charge, or worse pay off the entire loan to fulfill the contract early. The early payment will be detrimental to your strategy of receiving positive cash flow to improve bottom line. You can alleviate this risk by setting pre-payment penalty or disallow pre-payment in the contract. Alternatively, you can require the pre-payment is applied to the original loan (wrapped loan) first, not the owner financed mortgage. So as the seller you can pay down your mortgage principal faster than the buyer. This is greatly improve your yield.