What is a Contract Assignment and How Does it Work?

     A Contract Assignment occurs when you negotiate a sales contract with a seller, but never intend to close the sale or take possession of the property. Once you and the seller have properly executed a sales contract, you turn around and "sell" the contract to another person. You make money in the form of an Assignment Fee which typically includes reimbursement of any contract deposit money and the transaction profit (the net cash you want to walk away with). This is the simplest, and least risky, Profit Model, and a great way to get started in real estate.

MATRIX RATING: Low Risk, Low Complexity

INVESTOR LEVEL: Novice, beginner - great introduction to the business of real estate investing.

WHAT'S REQUIRED: Basic understanding of contracts and marketing is helpful. If you are working with a property in foreclosure, you may need cash to reinstate the defaulting loan and/or for whatever earnest money you plan to pay the seller up front.

WHAT'S OPTIONAL: If you have no cash, but have a credit card or credit line, you might need it to pay any earnest money deposit or to fund any other transaction expenses. Other than how it affects your ability to get a cash advance against your credit card or existing credit line, your credit rating plays no part in a Contract Assignment.

WHAT'S ADVISABLE: If this is your first real estate transaction (that is not your own home), have fun talking to people and making offers on properties. Do not act as a "third party" looking for a property for someone else. You must act at all times as if you are actually going to purchase the property, and negotiate with potential sellers in good faith that you (or your assignee) will buy the property as you have negotiated. Sellers can smell a tire-kicker, so be genuine in your negotiations and act as if you will be the one to purchase the property. This orientation also keeps you out of trouble with real estate regulatory authorities with whom you never want to leave the impression that you are not executing bona-fide contracts but are just using the assignment as a way around marketing and selling a property for a third party without a real estate license.

ASSESSMENT: Contract Assignments are by far the easiest and least risky type of real estate transaction. The simple reason for this ease and low risk is that an individual can make money without having to be a licensed real estate agent, while not actually buying a property or taking title to it. Although a contract is not legally binding without consideration, investors routinely execute contracts without any earnest money deposits - but executing a sales contract with a real deposit is recommended. An earnest money deposit can be as low as $1.00, but it should be paid to the seller by check or other traceable method.

BENEFITS: The right to buy a property can be purchased for very little money, and the contractual obligation to purchase can be transferred to another for a simple fee. No closing costs, no title transfer or conveyance necessary. Also, the assignor has no responsibility for filing and paperwork in the county public records.

CHALLENGES: Banks and other institutional lenders will no longer provide financing for assigned contracts. Contract Assignments work only with cash transactions and private money financing (i.e. Hard Money Lenders, private lenders, etc.).