Ever wonder how some investors can make money in real estate without ever owning a property?
That’s where an assignment fee comes into play… it’s the amount an investor charges for assigning their rights in a real estate contract to another buyer.
Simple, right?
Understanding this concept can open the door to new strategies and profits.
But!
There’s a lot more to learn if you’re serious about maximizing your REI opportunities and avoiding common pitfalls.
In this post, we’ll explore the nitty-gritty of purchase contracts with an assignment fee, how these fees are calculated, and the potential risks involved.
By the end, you’ll know whether this approach fits into your REI investment strategy… and how you can leverage it for success.
What Is an Assignment Contract in REI?
An assignment contract in real estate investing (REI) is a legal agreement that allows an investor to transfer their rights and obligations in a purchase agreement to another buyer.
This transfer occurs before the actual closing of the property.
Essentially, it lets you “assign” your position in the deal to someone else, who will then complete the purchase.
What Is an Assignment Fee in REI?
An assignment fee is the payment an investor receives for assigning their rights in a property purchase agreement to another buyer.
This fee is essentially your profit for finding and securing a good deal, then passing it on to someone else who will complete the purchase.
How Is an Assignment Fee Calculated & Is There an Average Assignment Fee?
Calculating an assignment fee can vary widely based on the property’s value, market conditions, and the terms negotiated between you and the end buyer.
But, it’s typically a flat fee or a percentage of the property’s sale price.
Some investors use formulas such as 10%-15% of the contract price or a standard fee, like $5,000.
So, is there an average assignment fee?
Well, it can vary quite a bit. Generally speaking, assignment fees for real estate wholesalers tend to range from $2,000 to $7,000.
But don’t be surprised if you encounter fees that go much higher — some experienced investors charge $10,000 or even $20,000 per deal.
Keep these variables in mind as you build your real estate investing career… every deal is different!
Assignment vs. Double Close
When it comes to flipping contracts, you have two primary options: an assignment or a double close (also known as a back-to-back escrow).
With an assignment, you transfer your rights and obligations in the purchase agreement to another buyer. You collect an assignment fee, and the end buyer closes on the property directly with the seller.
It’s straightforward and requires minimal up-front capital since you never actually take ownership of the property.
On the other hand, a double close involves you purchasing the property first, then immediately selling it to the end buyer — often on the same day, and even one right after another.
This way, you become the temporary owner and can potentially make a higher profit by marking up the property price. But, double closing usually entails higher costs, like closing fees and holding costs, even if it’s just for a few hours.
Each method has its pros and cons, so it’s crucial to choose the one that best fits your strategy and resources.
Possible Risks with an Assignment Fee
While assignment fees offer numerous benefits, it’s important to be aware of the potential risks involved. Understanding these pitfalls can help you navigate the process more effectively and avoid common mistakes.
Here are some of the biggest risks you should consider when dealing with assignment fees:
- Buyer Backing Out: If the end buyer fails to follow through on the deal, you could be left scrambling to find a new buyer or lose the deal entirely.
- Legal Constraints: Certain states and contracts have specific regulations that can restrict or complicate the use of assignment fees, potentially leading to legal issues.
- Seller Resistance: Some sellers may be uncomfortable or unfamiliar with assignment contracts, which can cause delays or even derail the transaction.
- Market Fluctuations: Rapid changes in the real estate market can affect property values, making it harder to secure a profitable assignment fee.
- Reputation Risk: Overcharging or unethical behavior can harm your reputation within the local real estate community, making future deals more difficult to close. So don’t be that guy/gal.
That’s a Wrap – What Is an Assignment Fee in REI?
Alrighty, so we’ve covered quite a bit about assignment fees.
You now know that an assignment fee is the amount an investor earns for transferring their rights in a real estate contract to another buyer. We’ve also touched on how these fees are calculated, the differences between assignments and double closings, and the risks you need to watch out for.
Remember, including an assignment fee in your deals can be a smart move for boosting your profits without ever holding/owning the property yourself. Plus, it offers a flexible strategy for those unexpected opportunities that come your way.
So, as you venture into your next deal, keep the assignment fee in mind. It could be just what you need to take your REI game to the next level.
Happy investing!
