What is an assignment fee in real estate?
What’s the difference between an assignment contract and a double close?
Most importantly, how can you increase your per-deal profitability as a wholesaler?
Those are the questions we’re answering in this guide!
What is an Assignment Fee in Real Estate?
An assignment fee is the money a real estate wholesaler makes when flipping a contract to a cash buyer.
Let’s walk through an example.
If you’re a real estate wholesaler, then your job is to find homes for good deals and flip them to cash buyers.
(Here’s our complete beginner guide to wholesaling)
Imagine that you find a property that the seller is willing to sell for $80,000. You determine that the ARV (After Repair Value) of the home is about $200,000 and, after crunching the numbers, determine that the deal is a profitable one even after the cost of repairs.
So you and the seller sign an assignment contract, which is basically your promise to purchase the home for $80,000 within a certain period of time.
But instead of purchasing the home, you flip this contract to a cash buyer (usually another real estate investor with cash on hand) for $90,000. Since your assignment contract with the seller was $80,000, you make an assignment fee of $10,000.
You can look at this as your fee for finding the deal for the cash buyer.
Assignment Contract or Double Close?
Now you might be thinking to yourself, “Why would a cash buyer be willing to pay $10,000 more for the home than they need to?”
First, if the cash buyer still stands to make a hefty profit after factoring in your assignment fee (which they should), then it’s not really a big deal to them.
In fact, high-quality cash buyers rarely care how much your profit is so long as they’re getting a good deal.
However, if you (the wholesaler) are still worried about the cash buyer rejecting your assignment fee, then you can instead double close. Double closing in real estate is when two transactions happen simultaneously (the seller sells to you and you sell to the cash buyer).
Here’s how RE Tipster explains it…
“A Double Closing (also known as a simultaneous closing) is a coordinated real estate transaction involving three parties: a seller, a real estate wholesaler (acting as a middle man) and an end-buyer. As the name implies, double closings involve two separate transactions that occur on the same day. The initial purchase and sale between the seller and the investor is the A-to-B transaction, and the purchase and sale between the investor and the end-buyer is the B-to-C transaction.”
In this case, it’s not necessary to disclose your assignment fee to your cash buyer.
How To Increase Your Assignment Fee as a Wholesaler
When Ryan Dossey — the founder of Call Porter — started wholesaling real estate, he was doing a lot of $3k and $4k deals.
His cost for acquiring those deals hovered between $1k and $2k… so he was barely breaking even.
Watching other wholesalers profit $10k, $20k, even $50k from a single deal, Ryan committed to doing things differently — learning from those with larger assignment fees and applying those lessons to his own business.
Now he regularly does wholesale deals that profit $16,000 or more.
Check out the video below!
1. Use The 75% Rule
The 75% rule is the go-to formula that Ryan uses when determining the profitability of a deal as a wholesaler.
The 75% rule states that investors should pay no more than 75% of the property’s ARV minus the cost of repairs. As a wholesaler, you also need to subtract out your assignment fee. Here’s how that formula works…
(ARV x .75) – Repair Costs – Assignment Fee = Max You Should Pay
Imagine that you found a property with an ARV of $250,000 and you expect repair costs to be about $20,000. Also, you want to make $10,000. Here’s how the math would work out…
($250,000 x .75) – $20,000 – $10,000 = $157,500
(For the cost of repairs, Ryan doesn’t just look at what needs to be fixed right now, but within the next 1-3 years… because this is what your buyers are going to care about)
This means that you should pay a max of $157,500 — that’s your max allowable offer (see the next section). This ensures that you and your buyer will make good money on the property.
2. Find Your Max Allowable Offer
One of the biggest game-changers for Ryan’s business is that he implemented a max allowable offer. After you’ve calculated the ARV of the home as well as your ideal offer using the 75% rule, set your MAO as a tangible number.
Then, when you negotiate with the seller, you’ll know the most amount of money that you’re willing to offer — this removes any guesswork from the equation and gives you permission to say, “No. I’m sorry. Our business just can’t afford to go any lower than XX.”
This is a tactic that salespeople use all the time… and it’s very effective.
When you have a clearcut offer that you can’t exceed, then it’s just business… and the seller can choose to accept or reject your offer.
Don’t sit down at the negotiation table without knowing your MAO… and make sure you have the willpower to stick to that number.
3. Learn To Negotiate
It’s a little funny. But the first time that Ryan reached out to his friend who’d been doing high-profit wholesale deals and asked, “How are you doing it?” Ryan’s friend responded and said…
“You know why you’re not making more money on your deals, Ryan? It’s because you’re a bitch.”
What he meant was that Ryan didn’t have the confidence to negotiate high-profit deals with sellers… and until he garnered that gusto, he’d continue to make less money than he desired.
That’s why knowing how to negotiate is so important.
Without the confidence (and math) to say, “This is what my business can offer.” you’re going to make very little money on your deals.
Using the 75% rule and having a max allowable offer will help you negotiate more effectively with sellers. You’ll know what you can realistically afford and what you stand to make.
And then, you’ll increase how much money you’re making on each deal and how profitable your business is overall!
4. Double Close Bigger Deals
It’s possible that as your assignment fee increases, certain cash buyers will shy away from working with you… because they don’t like that you’re making so much money.
(Of course, high-quality cash buyers won’t if they’re getting a good deal — see the next tip)
If that happens — or even if you’re just worried about it — you can start double closing your deals, which makes it so that you don’t have to disclose the size of your assignment fee.
Find great deals, make sure they’re still profitable for your cash buyers, raise your assignment fee, and then double close.
5. Find High-Quality Cash Buyers
As I’ve mentioned before, high-quality cash buyers won’t care about how much your assignment fee is so long as you keep passing them good deals.
So it’s worth spending a bit of time to find these types of buyers.
Check out our full guide to finding cash buyers over here.
6. Stop Trying to Convince Every Prospect to Work With You
Not everyone wants to work with you.
There, I said it.
I know you’re an amazing sales person (it probably comes naturally to you). I know that you’ve convinced people in the past to do things that they weren’t prone to do.
But here’s the truth: those instances are the exception, not the rule.
More often than not, unmotivated sellers, or kinda motivated sellers aren’t going to work with you.
They’re just going to waste your time.
And the faster that you kick those time-wasters to the curb, the better.
But isn’t that just a part of the business? Isn’t it natural to win some and lose some?
Yes. Of course.
But it’s not natural (or healthy) to spend time with tire-kicking prospects when you could spend that same time with motivated sellers…
…people who are in a hurry to sell their home. They’re in a bind and they aren’t just thinking of working with you, but your very business is a god-send.
They need to work with you. They need to sell their home. They need a way out of their situation.
Why are those people more profitable?
For a few reasons:
- They’re easier to convince to work with you in the first place (meaning you waste less time and money trying to convince them).
- They’re less interested in arguing against your offer and more interested in escaping their current situation.
So, recognize time-wasting prospects faster, kick them to the curb, and spend more time on the phone with their motivated counterparts.
You’ll decrease time-and-money overhead and increase the profitability of each deal that you do.
Schedule a demo with us to find out how we can help you spend less time on the phone and more time closing high-profit deals.
7. Don’t Try to Be Different (Do What Works)
Be a lone wolf.
The entrepreneurial world is riddled with these messages. Go against the grain. Forge your own blade. Blaze a new trail.
That’s where success lies. And to follow the crowd is madness.
But here’s what’s easy for us entrepreneurs to forget: by building a business (or starting a side hustle), we’ve already gone against the grain.
(most people never start their own business)
And there is a point where fighting what works becomes a silly battle of the ego rather than a good business idea (think Google Glass or Google+ – sorry Larry and Sergey).
Point is, doing what you already know works is often more profitable than trying new things.
Know which marketing channel brings in leads? Do more of that. Know which sales script converts the most prospects? Use that. Know which zip codes provide the best ROI, increase your marketing budget for that area.
Sure. Trying new things is important when what you’re doing isn’t already working.
But as my pops always said, “If it ain’t broke, don’t fix it.”
Spend more resources on what works and cut resources on what doesn’t. Your per-deal profitability will naturally increase.
8. Use the 80/20 Rule
Just a few of the things that you do every day…
…are sustaining your business…
…growing your business…
and increasing your profitability.
While many of the things that you do are a complete and utter waste of time.
Maybe you spend too much time on the phone with people who don’t actually want to work with you.
Maybe you spend too much money trying to make marketing methods work for your business (even though they don’t) because they work for someone else’s business.
Whatever the case, remember this all-important rule: 20% of the work produces 80% of the results. And 80% of the work only produces 20% of the results.
This is true with everything in life.
It’s why going on just one date with your spouse makes you feel a million times closer.
It’s why many of the most profitable deals you’ve ever done were also some of the easiest to nail down.
It’s why some things just seem to work and other things don’t.
Fortunately, you can use the 80/20 rule to your advantage.
By focussing more resources on the 20% of work that produces 80% of the results and spending less or no time on the near-worthless 80%.
Do what works. Cut what doesn’t.
Final Thoughts on Increasing Your Assignment Fee
There are two ways to build your business.
You can increase the number of deals you do every month with similar profit margins ($5k-$10k, for instance) and you can work like a dog. You can wonder why your business isn’t providing you with the time freedom that you crave and why you’re less happy than you were even at your W-2.
Or you can work smarter, not harder.
You can increase the profit on each deal you do by focussing on higher-quality deals, spending less time on the phone with half-motivated sellers (who are just there to waste your time), and building a business that serves you.
One, even, that you can leave behind every now and again to go on vacation with your family…
Without stressing about the darn thing going under.
So use the above three tips to build a business that makes you more money with less work.
Choose to work smarter, not harder, and your average assignment fee will naturally increase.