Assignment fees are the lifeline of property wholesaling. For beginners or even seasoned pros, understanding how to calculate assignment fees correctly can make or break a deal. In this guide, we’ll break down the essential steps to ensure you know how to price your assignment fees in any deal.
So let's dive into the specifics
What is an Assignment Fee?
In property wholesaling, the assignment fee is the amount a property wholesaler charges for assigning the rights to a contract that they have with the seller over to an end buyer. This fee is essentially the wholesaler’s profit for finding the deal and acting as a middleman.
1. Understand Market Conditions
The first step to calculating your assignment fee is understanding your local market conditions. If you're operating in a hot market with a high demand for properties, you can generally charge a higher assignment fee. On the other hand, in a cooler market, a smaller fee might be necessary to close the deal. Interest rates help drive the market so make sure you’re familiar with recent sales prices, the availability of comparable properties, and the trends that can affect buyer demand.
2. Start with the Spread
The spread is the difference between the contract price (what the seller is asking) and what the buyer is willing to pay for it. Anything in between is what you can charge for your assignment fee. The after-repair value (ARV) is crucial. If the buyer is able to get a good bit of equity in the deal or it's too good of a deal to pass up, then the sky is the limit in what you can ask for your assignment fee. For example, if the seller wants $80,000 and the ARV is $200,000 but you're selling it to the end buyer for $130,000 then the spread of $50,000 ($130,000 - $80,000=$50,000) can be your assignment fee. The buyer is walking away with $70,000 worth of equity!! Depending on market conditions, a buyer in this case has plenty of meat on the bone and may be more than willing to quickly purchase the property.
3. Factor in Your Effort and Time
Your effort is worth something too! If it took significant time and effort to find the deal or negotiate a favorable contract, you might justify a higher fee. Also, if you have added value through your expertise or negotiation skills, it makes sense to charge more.
4. Review Local Assignment Fee Norms, State Laws, and Regulations
In some areas, assignment fees of $10,000 or more are standard, while in others, buyers may balk at anything above $5,000. It's important to understand what's typical in your area, so you're not pricing yourself out of deals. Don't lose a deal trying to have high assignment fees. There must be a win for all in property wholesaling - for you, the buyer and the seller. Be sure that you check with your local state government or realtor's association to ensure that property wholesaling is legal in your area and if there are any stipulations on assignment fees.
5. Communicate the Fee Clearly
Before entering a contract with the seller or the buyer, you must be transparent with your role as a "middle person". Your contracts should clearly outline who will pay the assignment fee, that you are a property wholesaler, and that you will be assigning the rights over to a buyer; however, I typically don't don't disclose to my sellers what the assignment fee is. I do however, disclose the amount to the buyer upfront. Transparency helps avoid any misunderstandings later in the deal, ensuring a smoother transaction for everyone involved.
Conclusion
Calculating your property wholesaler assignment fee requires knowledge of the market, a clear understanding of the deal spread, and a bit of negotiation finesse. By following these guidelines, you can ensure that your assignment fees are fair, transparent, and profitable.
The information in this article are for informational purposes and are the opinions and experience of the author. Due diligence should always be exercised before venturing into real estate.
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