Real estate assignment sales, also known as flipping contracts, have become increasingly popular in recent years. In an assignment sale, the original purchaser of a property sells the rights to that purchase contract to a new buyer prior to closing. As a buyer, assignment sales can provide unique opportunities to purchase properties at discounted prices with built-in equity. However, these transactions also come with risks and complex legal considerations. This comprehensive guide examines the ins and outs of buying real estate on assignment to empower you to make informed decisions.
What is a Real Estate Assignment Sale?
In simplest terms, a real estate assignment sale happens when:
- Buyer A enters into a purchase agreement to buy a property from the seller/developer.
- Before taking possession or legal title, Buyer A sells their contractual rights to the property to Buyer B in exchange for an agreed payment.
So Buyer B assumes Buyer A’s purchase contract and ultimately closes on the property. The key defining aspect of an assignment sale is that the legal title or deed does not transfer until closing with the end buyer.
Assignment sales frequently occur with pre-construction condominium purchases. The original purchaser may choose to “flip” their contract if market prices appreciate or their circumstances change. By selling the contractual rights, they can profit without incurring closing costs.
Why Consider Buying an Assignment Sale?
There are several unique advantages to buying real estate via an assignment sale:
Purchase at Below-Market Value: Assignment contracts are often sold below fair market price, allowing buyers to secure properties for less. Sellers may accept discounts to exit contracts quickly.
Built-in Equity: Any price appreciation or added property value between contract singing and assignment closing goes to the buyer. This provides instant equity.
Customization: Depending on timing, buyers may get to select interior finishes like flooring, countertops, etc. This personal customization is rare with resales.
Faster Closing: Assignment purchases close almost immediately rather than waiting through long pre-construction periods. This improves cash flow timing.
Investment Potential: As marketsrise, assigned contracts can generate excellent returns for investors seeking short-term gains. Properties can be resold again before closing.
For buyers who understand the risks, assignment sales unlock unique real estate investment opportunities unavailable through traditional channels.
How Does the Assignment Sale Process Work?
While rewarding, completing an assignment purchase involves more complex legal and financial steps than typical closings. Here is the basic process:
- Original Purchase Agreement: Buyer A contracts with the developer to purchase the property.
- Assignment Agreement: Buyer B agrees to purchase the rights & responsibilities per the original purchase agreement from Buyer A.
- Developer Approval: The developer reviews and formally approves assigning the purchase contract to Buyer B.
- First Closing – Rights Transfer: Buyer B provides payment to Buyer A to assume contractual rights. Funds are held in trust by lawyers.
- Second Closing – Property Transfer: Buyer B closes on the property with the developer, finalizing the purchase.
Both buyer and seller retain real estate lawyers during an assignment sale. All agreements should be carefully reviewed before signing to understand rights and tax implications.
Weighing the Pros and Cons of Assignment Purchases
While discounted pricing and equity gains tempt buyers, assignment transactions have risks to consider. Weigh the key pros and cons before proceeding:
- Lower Entry Price: Assignors sell at a discount to exit quickly and avoid future closing fees. This discounts purchase costs.
- Built-In Equity: Buyers inherit any appreciation gained since the original purchase. This provides an instant return on investment.
- Custom Finishes: Buyers may select interior finishes depending on the build stage, allowing personal customization.
- Quicker Closing: Assignments close within approximately 45 days rather than waiting through lengthy construction.
- Strong Investment Returns: Flipping contracted units can generate strong returns quickly in rising markets ideal for investors seeking short-term plays.
- Limited Selection: The inventory of assignable units is always smaller than the MLS residential resale market.
- Complex Legal Process: Assignment contracts require careful review as buyers assume all risks. It also involves extra fees, taxes.
- Transaction Uncertainty: The process depends on several independent parties, creating uncertainty. Delays or disagreements can disrupt deals.
- Downside Market Risk: If the market shifts during the process, assigned contracts may sell at losses or fail to find buyers.
- Speculation Drives Volatility: Assignments are common speculative plays, causing sales trends to overheat then crash rapidly. This introduces pricing risk.
As with any real estate purchase, conduct thorough due diligence, review agreements carefully, research market conditions extensively, and consult professionals. While rewarding when done right, assignments have less margin for error than typical closings.
Navigating the Complex Legal Landscape of Assignments
Beyond unfavorable pricing risk also lies legal liability risks for unwary buyers. Assignment sales exist in a gray area legally. While legitimate, they violate most purchase agreements. And complex contract transfers open the door for disputes. Consider a few key legal factors:
Purchase Agreement Restrictions – Most developers prohibit advertising contract assignments in purchase agreements. But silent sales happen despite restrictions. Tread carefully during marketing to avoid contract cancellation.
Tax Implications – Capital gains taxes apply on profits. But tax deferrals or exemptions based on use as a primary residence may ease burdens. Consult accountants to maximize after-tax returns.
Title Liability – Courts may impose legal judgments that create future property liens. Ensure title insurance covers liabilities tied to the assignor that could impact closing.
Deposit Structure – Deposits range from 5% to 20% down payment on assignments. Low deposits postpone payments but reduce quick profits. Expect to mirror original purchaser deposits.
Closing Fees – Legal fees often run higher for assignments. Transfer taxes and developer fees also apply. Model all costs accurately to determine actual investment returns.
Build contingencies into assignment agreements and work with specialized real estate lawyers to shield yourself from unnecessary risks. Respect contract restrictions and understand the developers can rescind illegally marketed deals.
How Market Conditions Impact Assignment Investment Potential
Not all real estate markets hold equal opportunities for contract flipping profits. The risks and returns of assignments shift dramatically based on broader housing market movements. Consider how conditions impact outcomes:
Appreciation Accelerates Gains – Rapid price growth allows assigned contracts to sell far above original purchase values, enabling immense profits.assignments thrive in up-trends.
Declines Spell Danger – Falling prices lead banks to deny financing and panic sellers to offer fire sale pricing. Avoid assigning in downward momentum.
High-Demand Fuels Churn – Low housing inventory and fierce competition incentivize rapid resales sight-unseen. These conditions produce bidding warsideal for profit.
Oversupply Skews Values– Surplus units create uncertainty and incentivize developers to dropprices. Expect below-market sales and limited interest when supply outpaces demand.
Closely follow housing indicators like pricing trends, resale volumes, inventory levels, mortgage rates and construction activity before investing in assignments. Properly reading conditions separates big profits from losses.
8 Insider Tips for Buyers of Assignment Sales
Follow these key tips to tilt the odds of success in your favor while buying real estate assignments:
1. Find Knowledgeable Agents – Seek out brokers specialized in assignments who can accurately assess risks and valuebased on deep market experience.
2. Inspect Properties Yourself – Do not rely solely on assignor representations. Visit personally whenever possible, even for pre-construction units, to verify conditions.
3. Verify Financing Pre-Approval – Confirm lenders will finance the property prior to closing. Also validate terms like rates and income requirements.
4. Examine Title Documents – Require title insurance listing you as the insured. Thoroughly review for past liens or future obligations impacting your rights.
5. Review All Contracts Extensively – Scrutinize original purchase and assignment contracts. Understand all timelines, contingencies, restrictions and fee clauses with no assumptions.
6. Model True Returns – Calculate accurate profits based on fees, taxes and financing costs. Do not rely on assignor estimates alone when negotiating.
7. Build In Exit Strategies – Structure contingent clauses allowing you to reverse the purchase if issues emerge later, like unsuitable inspection findings.
8. Complete Assignments Quickly – When selling rather than occupying, quickly flip assigned contracts again through silent sales before final closing to maximize gains.
Above all, exercise patience and only proceed with expert guidance when criteria align favorably with your investing goals.
Case Study – Leveraging Assignments for Short-Term Profits
Assignment sales offer particular appeal for real estate investors aiming to capitalize on market uptrends. As a case study consider Frank, an individual investor in Toronto, Canada.
Frank identified a pre-construction townhome development projected to complete construction within 12 months. The project had 66% of units pre-sold to individual buyers. Frank estimated 15-20% future appreciation given active homebuyer demand and tight resale inventory in the neighborhood.
He contacted agents to find sellers interested in assigning purchase contracts before closing. After offering 10% finder fees, agents located six investors seeking quick exits to cash in on valuation gains and upgrade units.
Frank negotiated a $92,500 purchase via assignment below the $102,800 prior sale price. Given the $10,300 appreciation and avoiding $7,500 upcoming closing costs, the effective discount totaled $25,600 (20% below true value).
By offering $2,000 assignments to agents, Frank quickly resold the unit rights six times across four months for between $115,000 and $118,750 per sale as values continued rising. After costs including taxes, Frank walked away with $43,050 profits from an initial investment of just $10,000 over five months for a 334% unleveraged return.
Potential Drawbacks & Risks Buyers Should Consider
Despite major upside, assuming real estate contracts through assignments also harbors downside dangers. As an educated buyer, consider these potential pitfalls:
Fickle Developers – Initial buyers violate resale clauses in purchase contracts. Reassignments depend on developers not exercising cancellation rights. Seek their formal approval.
Market Shifts – Unexpected housing plunges between purchase and closing can trap buyers in losses. Execute quick flips to avoid exposure.
Litigation Risks – Legal disputes between assignors and developers could later impact property. Prioritize title insurance with liability coverage.
Inspection Limitations – Buying unbuilt homes limits full unit inspection. Carefully assess pre-construction sites to gauge overall quality risks.
Financing Issues – Lenders scrutinize assignments more closely and can deny mortgages if risks appear concerning, leaving buyers cash-strapped at closing.
Buying an assignment contract is risky. But for informed buyers who safeguard their investments, leverage knowledgeable professionals, and remain vigilant regarding market conditions, it offers a path to achieve outsized profits unavailable to most real estate investors.
Critical Legal & Regulatory Considerations
Beyond risk factors directly tied to housing valuations also emerge legal and regulatory risks associated with assignments. Consider key legal elements buyers must navigate:
Contract Adherence – Breaching original purchase terms could void contracts. Strictly manage all dates, payments and requirements.
Funding Contingencies – Record escape clauses in case suitable financing gets denied unexpectedly at closing.
Disclosure Forms – Fully complete governing property disclosure paperwork to avoid future liability claims from developers or occupancy buyers.
Title Insurance – Obtain policies that explicitly cover interim liability arising between contract transfer points. Ask for gap coverage between transactions.
Tax Obligations – Declare and pay all taxes owed on profits per local and federal codes. In the US, capital gain taxes often apply on flipped contracts.
Consult real estate attorneys before buying assignments. As a high-risk endeavor for amateurs, legal pros prove instrumental to steering past pitfalls at each transactional milestones.
Key Takeaways – Should You Buy A Real Estate Assignment?
Assignment sales carry an alluring appeal. Discounts up to 20% on properties and equity gains attract buyers and investors eager to leverage real estate without excessive capital outlays. Yet unprepared buyers also risk major losses from complicated transactions.
When weighed carefully against individual risk preferences and guided by knowledgeable professionals, assignments can offer profitable opportunities unmatched by traditional channels. But small missteps compound quickly across the multiple sales required.
Ultimately by educating yourself extensively, thoroughly planning investments, accurately assessing housing markets, and paying for competent legal representation, you can maximize upside potential while minimizing unnecessary risks.
So while assignments merit caution, they can unlock immense wealth for disciplined investors. If you elect to pursue a contract sale, embrace the tips and best practices outlined above as an informed real estate buyer.