How to Make Money Flipping Contracts

We are going to answer a question we saw recently posted on an Internet real estate investing group site. That questions was "how to assign a purchase contract and make money?" Before we can answer the question, we must first answer the question, what is assigning a contract?

Assigning a contract is basically giving another party your rights and privileges in a contract in exchange for consideration. In legal terms, "consideration" is anything of value. It could be goods, services, promises, money, etc. It is anything that is of value to the parties involved in the assignment. For our usage of the word "consideration", we are going to refer to it as "money".

For the sake of the real estate transaction, an assignment works like this-- there are two basic parties in the real estate transaction, the seller and the buyer. The seller has a property that he is willing to sell for a price and the buyer is someone who is interested in purchasing the property for a price. We are going to keep things simple and skip over the whole negotiation process to arrive at the point when the seller agrees to sell for the same price that the buyer is willing to buy for. At this point we have a "meeting of the minds" and the agreement is reduced to a purchase contract. Important note-- a real estate contract is one of the few agreements that MUST be in writing to be legally binding. Furthermore, any contract is assignable unless it says that it not assignable.

Now that the buyer has a contract in hand, he can go ahead and perform all of the duties spelled out in the contract to eventually arrive at the closing table and receive title to the property or he can sell his rights to someone else who will step in as if they had signed the original contract, perform the duties in the contract, and close on the property. This new party is legally called the "assignee". The party who assigned the contract is the "assignor". We will refer to the "assignee" as the "end buyer".

To transfer the position in the contract, the buyer and the end buyer would sign another document called an "assignment of contract". After they sign the document, the end buyer would give the buyer consideration (money) which is the assignment fee, the end buyer would receive the original purchase contract and the assignment of contract and proceed to closing. That's the assignment of contract in a nutshell.

Now let's give an example using real numbers. Let's say the seller and the buyer enter into a contract where the buyer will purchase the seller's property for $60,000. The buyer knows that once the house is fixed up, it will be worth $120,000. The buyer then goes out to find an end buyer who is willing to buy his position in the contract for a $5,000 assignment fee. The buyer and the end buyer would sign the assignment of contract. The end buyer would then give the buyer $5,000. In turn, the end buyer will receive the purchase contract and the assignment of contract and give it to the escrow agent. At closing, the buyer will give the seller $60,000 and receive title. So, in essence, the seller bought a property that has an after repaired value of $120,000 for $65,000.

That's a basic example. In reality, unless you have built a relationship with the end buyer, he is not going to pay you your assignment fee up front. He will typically pay the assignment fee to the escrow agent and everyone would get paid at closing.

The assignment of contract is very simple. It is an excellent way for the new investor to make money in real estate.

One other important note... You will usually do these types of deals when the property is not a bank-owned, or real estate owned (REO) property. The bank is usually not going to allow you to assign your interest in a contract to someone else. They will require you to close on the property with your own funds. Look for our article in the future about how to fund real estate deals when you cannot assign the contract.