Contract Assignments - Friend or Foe?

Our current housing markets as a whole being sluggish have brought out a tremendous influx of investors wanting to take advantage.  The competition is fierce for those trying to find properties at bargain basement prices so investors have to be creative in locating them.  One way that is seeming to be catching on is through contract assignment.

A contract assignment occurs when an Assignor (middle-man) finds a property and secures it with a contract.  He or she then finds a buyer for this property and assigns said contract to them at a higher price than what he negotiated but usually still at a discount.  The difference becomes profit for the Assignor and having never taken title to the property, is an extremely safe and purely profitable endeavor.  

Here’s an example:

Johnny (Assignor) finds a property worth $200,000 and is able to secure a contract with the Seller for $120,000.  He has been working with a few different investors who are looking for properties to buy with at least 20% equity in them.  Johnny is able to sell or assign this contract to one of his investors and effectively make $20,000 without having owned anything.

While this sounds like an easy way to make money, be aware of some of the pitfalls associated with doing this type of business.

1. Be prepared to close or lose your earnest money if you don’t find a buyer for your contract.
2. Have several investors in line to buy your contracts as you start to search for properties and then find properties suiting their particular “appetites” as it pertains to location, profit margin, etc.  If not, you might end up owning the property.
3. Have an exit strategy.  If you do end up buying the property, be sure you have the means to carry the note, repair the property, and market the property in order to minimize your hold time.  Interest carry and sales expenses can eat up any gains you may receive.
4. Have reliable valuation opinions.  Don’t rely on tax appraisals or other unreliable sources for your basis of value.  Get recent data of recent sales of like properties within the past 3-4 months preferably.

Now, more than ever, there are opportunities out there which are ripe for the picking.  Take advantage of them.

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