Whether you’re new to wholesaling, a real estate investor or agent looking to learn more about the “assignment business”, or even a homeowner asking…
… We want to give you a complete guide to understanding the assignment contract and fee from all angles.
Here’s a list of all the questions we’ll be covering:
- What is an assignment fee?
- Reasons to use an assignment?
- How to assign a contract?
- Is it legal?
- Is it ethical?
- How much should a fee be?
- Who pays for it?
- Does the seller or buyer see the fee?
- Alternatives to an assignment?
- Assignment fees and agents?
- Where to get a contract?
- How to increase your assignment fees?
- How to find discounted properties to wholesale?
1. What’s an assignment fee?
First and foremost we have to define the term.
An assignment fee is a payment from the “assignor” (wholesaler) to the “assignee” (cash buyer) when the assignee transfers their rights or interest of a property to the assignor during the close of a real estate transaction.
Most often, this term is used in the real estate investing strategy of “wholesaling”.
The business of a “wholesaler”, is grounded in the assignment fee: They negotiate to buy a property, then while in the close of escrow they find a cash buyer. They will then sell the rights to that contract to the cash buyer for a fee.
In practical terms, the “fee” is the difference between what you negotiated in price with the seller, and what you negotiated with the end buyer.
You find a seller who’s willing to sell her property for $250,000 dollars to you, cash. While in escrow you find a cash buyer who’ll be willing to buy that property for $260,000 cash. When it closes, you make $10,000.
Typically, most real estate contracts are “assignable”, meaning they can be transferred to another party; you mind find it expressed as an “assignment clause” or simply stated: “This contract is assignable”.
You’ll often hear this term amongst wholesalers, but there are other practicable uses for it as well…
2. Reasons to use an assignment
We covered why wholesalers do it: to make money.
But there are other reasons someone might need to use their assignment provision.
Changing ownership title
If the contract is in your own name… but then, while in escrow, you want to change the “owner” to a trust rather than your personal name, you can then use the “assignment” clause.
Finding a partner
While in the closing process of buying a property, you might come across a partner who’d like to have his equity/investment protected as well. So in that case you and your partner create a new entity and assign the rights of the contract to the new entity.
3. How to assign a contract?
Assigning a contract and taking a fee is as simple as giving instructions to your escrow or closing attorney, as long as the contract allows for that provision of assignment.
But the hard part is getting the price right…
It’s not as simple as finding a property on the MLS, saying you’re a cash buyer, then finding a real cash buyer to buy it from you at a mark-up.
There has to be “meat on the bone” for everyone AND a price that’s good enough for the seller to say, ”YES!”.
Most cash buyers will not buy a property at full retail value. There needs to be a way for them to make money either in a flip or having some equity in it if they decide to rent it.
That means, you as the wholesaler—who’s collecting assignment fees—need to find good deals for these cash buyers; that’s essentially what your job is: to find discounted properties.
What seller in their right mind will sell at a discount?
Many do, and for all sorts of reasons.
Here at Ballpoint Marketing, we specialize in creating marketing material for off-market investors looking for properties at a discount. Some of the marketing material that wholesalers might purchase from us to find these good deals is our real handwritten door hangers that you can pick up for .45¢ a piece.
4. Is it legal?
“Wholesaling” is a hot topic on the web and a source of a lot of controversies.
However, assigning a contract for an assignment is not technically illegal as long as the contract and both parties agree to it. If a State makes “assigning” illegal, then that hurts other people who are using assignments to change the name of the buying entity or assign to their family and/or partners.
However, there are many states that are against wholesalers and creating laws against them. That’s why you should meet with a real estate attorney to find out what you can do, and what you can say when you’re a wholesaler collecting assignment fees, however, at the time of this writing they have not exactly made wholesaling “illegal” but place restrictions like for example:
- Saying “I have a property to sell” when you actually don’t because it’s still in closing. Rather, You have a “contract” for sale.
- Representing the buyer when you’re not a licensed real estate agent under a broker.
There’s a very fine line between what a wholesaler does and what agents do. You have to make sure what you say and do doesn’t cross those lines.
Here’s a great video on why wholesalers have a bad rep and what you can do differently:
5. Is it ethical
Now that we got the “legal” question out of the way…
What about “How ethical is it to wholesale”.
Type that into the web and you’ll get thrown into a black hole of comments and forums chatter you won’t ever be able to get out of.
Here’s the bottom line of why it gets so much controversy and what it has to do with assignment fees…
Wholesalers are going around marketing “We buy houses CASH” when in reality, they aren’t buying it cash… they’re assigning the contract for a fee.
This is where everyone gets their tights all tied up in a bunch (did I just make up a word?! Yes! I did).
Because if you say you’re going to close it with cash, but you have to walk away from the seller because you can’t find a buyer… how would you feel leaving a seller (who seriously needed to close yesterday), hanging)?
Some with a conscious would feel pretty bad… others don’t care.
So it’s up to you how you feel about the ethics side of things.
Can you close the deal yourself if you can’t find a cash buyer, via a hard money lender or partner? Or will you feel comfortable walking away from the deal? Or will you be confident enough to go up to the seller and tell her the truth, that you intended on selling the contract to a cash buyer but it seems that your priced it too high, can we renegotiate?
The underlying problem with “walking away” from a buyer is not pricing it right.
If you have a good deal, cash buyers will be all over it and be HAPPY to pay you an assignment fee.
Here’s a video on ethical wholesaling:
6. How much should a fee be?
New wholesalers typically aren’t sure what they should charge. But it’s going to vary from deal-to-deal, and market to market.
A decent wholesaling fee can range from $10,000 to $30,000.
There are occasions when you hear about $100,000 assignment fees. And they do happen. It’s just a matter of negotiating a good deal.
While there isn’t a “set fee” that wholesalers should charge, it all depends on how good of a deal you can negotiate, and how high you can mark up the contract for an end buyer.
So there are two components that determine how much you can get paid for an assignment fee:
- Seller’s price.
- End buyers price.
Later, in another section, I talk about how you can increase your assignment fee… for now, let’s just cover how much your can charge.
Earlier I mentioned that your market might have an influence on how much you can charge. And that has more to do with how low of a discount, sellers are willing to take AND how competitive it is in your market.
Here’s an example:
If a seller talks to three wholesalers, one offers $200,000 while the others offer $180,000, she most likely will go with the higher offer. Well, now those wholesalers might enter into bidding wars in the market, by creeping up their MAOP (Max allowable offer price).
When wholesalers start raising their Max offers (because the market is demanding it), AND if the end buying price (what cash buyers are willing to pay for that deal) does move up with it…
Then you start seeing wholesalers’ assignment fees start shrinking down. We’ll go over later some techniques for helping with this natural occurrence in the market.
Here’s an example of a real wholesaler using our handwritten mailers, in a case study where he made anywhere from $4k fees to $22,500
7. Who pays for it?
Typically, in a traditional real estate wholesaling model, the end buyer (the cash buyer) is paying for your assignment fee.
For example: You negotiate with the seller to buy the property for $100,000. And the end buyer agrees to buy this deal for $120,000. He enters into escrow and pays the $120,000. You get the difference between the seller price and the end buyer price.
8. Does the seller or buyer see the fee?
In a typical assignment transfer, yes your assignment fee will be inside the closing statements.
After a property closes escrow, every party involved will get “closing statements” that look might look like this (depending on your state and the companies you use):
One of the line items may show up as “Assignment Fee” (or something similar), and show the amount.
Buyers will see these, as well as sellers.
However, a cash buyer (usually) understands that wholesaling is A LOT of work and that you should get paid for it. A good cash buyer understands that.
Sellers, most likely, won’t understand what an “assignment fee” is when they see this doc (they most likely won’t even read it).
On the rare occasion that they actually do ask what that line item is, you can tell the truth like this: “We work with partners and lenders all the time, and sometimes we end up selling the property during escrow to these partners, instead of keeping it ourselves. In this case we ended up selling to them”.
There’s a way to circumvent this potential problem of an assignment fee showing up on the closing documents…
And that’s by doing a double close instead of an assignment.
Let me explain in the next section…
9. Alternatives to an assignment?
As mentioned in the previous section, an assignment fee can have some cons to it. The primary being that sellers AND buyers can see how much you’re getting paid.
However, there is another “tool” you can use that hides this from both parties, and that’s called the “double close” (sometimes referred to as a “simultaneous closing” or “back to back” closing. As the name implies, there are 2 separate closings, not 1 (like our assignment fee transaction).
Here’s an explanation:
- The homeowner (party A) agrees to sell to a wholesaler (Party B) for $100,000
- They enter escrow
- While in escrow, Party B finds a cash buyer (Party C)
- Party C agrees to buy that property for $150,000
- They enter a second escrow agreement (different from the first)
- Party C funds the escrow account to buy the property at $150,000
- Party B uses those funds (minus his “assignment fee”) to pay the purchase from Party A
A little confusing?
Maybe this infographic helps:
We won’t go into too much detail about this as this is an article on the assignment fee… But just know that there is an alternative to hiding your fee but using a double close.
The con to this is that you pay a little more because you’re in fact doing 2 closes, not 1. So the times you might want to a double close vs an assignment fee is when you negotiated a very good deal and want to conceal the big check you’ll be getting.
10. Assignment fees and agents?
Anyone can get paid an assignment fee for this kind of “wholesaling” transaction. There’s no law that says agents can’t. However, that agent/broker needs to pay careful attention to their State RE commission laws as they’re put under serious scrutiny if they walk any fine lines.
For instance, if you’re buying the property and wholesaling it AND you’re licensed… in most states, you have to express to the seller that you are a licensed real estate agent but you are NOT representing them, and instead the principle of the transaction.
If you’re an agent wondering if you can (or should) do this, first contact your broker or RE Commission office to find out more.
Secondly, you might want to reconsider doing this as in some markets agent commission fees are higher than typical wholesaling fees. This is rare, but there are some hot markets where wholesalers have to keep raising their prices to win the deal, and therefore lower their assignment fee.
11. How to increase your assignment fees?
As mentioned in a previous section, your fee is greatly dependent on the kind of deal you negotiate.
So if you get a deal at $100,000 and another investor (cash buyer) is willing to pay $150,000 for it, you walk with a $50,000 assignment fee (assuming no closing costs are removed from this).
There are 4 factors to increasing your assignment fees…
- Become a better marketer
If you improve your knowledge and skill set in marketing, you can essentially get to motivated sellers before anyone else.In the next section, we cover how to find these properties, which has everything to do with marketing, but one way (that we specialize in) is using handwritten mail to gain the best response rates from sellers.
- Become a better negotiator
If you study and practice good salesmanship you can effectively win deals even if you’re offer is “low”. If you have no experience in sales, this will take time, but there are loads of resources available online (free and paid) that you can take advantage of. But, if you’re planning to stay in this entrepreneurship game for the long haul I HIGHLY suggest you study sales on a regular basis.
- Know you numbers
Getting better and better at knowing what your market demands in terms of prices, rehab costs, etc… will help determine a more accurate price at a faster rate. Why does this matter to getting paid a higher assignment fee? It’s 2 reasons: First, if you know that cash buyers are willing to pay X, you can raise your asking price from end buyers, or on the flip side of that if, you know that a house needs some major repairs you can use that negotiated a lower price with the seller…Secondly, if you are really good with numbers, you can give an offer faster than your competition who has to take 1-2 days to send an offer in. In competitive markets “Speed to lead” wins and the person who can act fastest is usually the one who takes the trophy.
- Build a thriving buyers list
The second component of the assignment fee and wholesaling business is selling the contract to a cash buyer.And, if you can build a list of buyers who will pay more for a good deal than most of the other “bottom of the barrel” buyers who demand very steep prices.Where do find buyers willing to pay more? It’s usually among high w-2 earners (doctors, lawyers, etc) who like to flip houses on the side. Or high-income business owners looking to park their cash somewhere to earn 15%+ annual ROI by doing so occasional flips.If you can find them, network with them, and add them to your list you can essentially raise your property raise to increase your assignment fee
12. How to find discounted properties to wholesale?
Finally our last section in this article which is probably at the top of some people’s minds:
“Assignments sound great, but how do you FIND discounted properties!?!?”
Wholesaling is probably one of the toughest occupations in real estate.
You have to be well-rounded in almost every aspect of the industry. And you have to be top-notch in your selling and marketing capabilities.
But with that, there are foundational techniques to help you find these properties on your own. I’m going to give you 2 resources to start below.
First, is our article “8 ways to find 100 sellers for under $500”
Second is our eBook on Direct mail
You can get the Ebook for free by subscribing below to our newsletter, where we give lessons, stories, and value every week to real estate investors like you…