Assignment, option, JV, A-B, A-C…
Before you start thinking I’ve just thrown out a bunch of letters and words, these are actually the types of contracts that real estate investors, especially those of us in wholesale real estate investing, use when conducting a deal.
After you’ve established the value of a property that you want to move on, you’ve found a buyer that’s interested, and you’ve calculated all the costs involved, it’s time to put a contract together.
But which one?
I listed 5 types of contracts at the top and each of these has its purpose depending on the type of deal you have. Using the wrong type of contract can impact everyone involved and can ultimately cause the deal to fall through.
In this blog, I’ll explain and walk you through the 2 most common contracts: the A-B and the assignment so you’re prepared for whatever deal comes your way.
The Contracts You Need When You Need Them
Let’s start with the most common contract investors will come across – the A-B contract.
The A-B Contract
These contracts are done between the buyer and the seller which opens up the first leg of a transaction. The purpose of this contract is to:
Secure our right as the investor to purchase a property
Establishes the equitable interest in that property
Describes the rights and responsibilities of each party, protecting both the buyer and the seller
Establishes the different timelines within the deal, such as the inspection period, any financing being done, what happens at closing, etc
Clearly discloses the intent of the buyer/investor and any potential conflicts
Most deals investors will do often use this type of contract, so it’s a standard, but just because it’s a standard when it comes to doing deals, that doesn’t mean you shouldn’t read it.
If you want to know the consequences of not reading contracts, make sure you click below to read about the mistakes I’ve made as a new investor:
Now while the A-B contract is the most common contract used, there is – as Yoda would say - another.
The Assignment Contract
The assignment contract is probably the most popular when it comes to investing contracts.
Assignment contracts are the transfer of the position of contract from one party to another. Assignment contracts are done when you have an established contract with a seller and you are assigning your role as the buyer to another person.
So for example, if we as the investor contracted to buy a property from a homeowner, we acted as the buyer.
If we then want to sell that contract to another investor, we would then become the seller and the other investor would become the buyer.
These contracts are most often used for:
Transactions that involve wholesale real estate investing
Acquisition co-wholesale transactions
Disposition co-wholesale transactions
Both of these contracts are different, however they do have a lot of the same language, like:
The date of the contract
All of the parties involved
Address of the property
The purchase price of the property
Any earnest money deposits (EMD) amounts
The title & escrow company or attorney
The responsibilities of each party
Inspection period time
When it comes to assignment contracts, especially if you’re working directly with an agent, make sure you’re checking to see if that initial contract can be assigned or not.
This is why you need to make sure that you’re reading the contract fully before you sign on the dotted line.
Just like any other contract.
What About Other Contracts?
So I’ve explained two of the most common contracts that we use as real estate investors and real estate wholesalers, but as I mentioned, there are other contracts that you can use.
For instance, there’s the joint-venture agreement contract. This contract is when you’re planning on doing a deal with someone else or a group of individuals.
JV agreements are usually great for those who are just starting out because it means they can be a part of a deal with a more experienced investor.
That sounds like a great deal, right?
The challenge with JV agreements, especially in real estate, is that people don’t understand how they’re supposed to work, who should do what, and in some cases, the idea of partnering up means you get less money.
That of course isn’t necessarily true, depending on the deal, but that idea is what can keep you from doing something equally important…
Building up relationships and experience.
Contracts are something that you’ll encounter when investing and hopefully, you’ve gotten a better understanding of what the two most common ones are.
If you want to learn more about these, be sure to check out my video below by clicking the link:
And as always, if you want to get into the nitty and the gritty of real estate investing, hop on into the AstroFlipping community.