In the world of real estate wholesaling, an assignment fee is a key piece of the puzzle. But what exactly is it, and how do you make sure you're charging a fair amount? Whether you're a seasoned wholesaler or just getting started, understanding what makes a fair assignment fee can make or break your business. In this post, we'll cover what assignment fees are, how to calculate them, and best practices for making sure you're staying fair to both sellers and buyers.
What is an Assignment Fee in Wholesaling?
In simple terms, an assignment fee is the money a wholesaler earns for acting as the middleman between a seller and a buyer. Here's how it works:
The wholesaler finds a distressed property (one that’s often priced below market value).
The wholesaler gets the property under contract at a set price with the seller.
The wholesaler assigns that contract to a buyer (usually an investor), who pays the original price plus the assignment fee.
The assignment fee is essentially the wholesaler’s profit for finding the deal. So, how much is fair? That’s what we’re here to figure out!
How Much is a Fair Assignment Fee?
The exact amount can vary widely based on several factors, but most assignment fees range between $5,000 and $20,000. However, it's not uncommon for the fee to be lower in some markets or higher in others. The key is making sure both the buyer and the seller feel the fee is reasonable for the value you're providing.
Factors That Influence Assignment Fees:
Location: In high-demand areas, assignment fees can be higher because there’s more competition and properties cost more.
Deal Size: Larger deals often command larger assignment fees, but not always. If you're assigning a multi-million-dollar property, a fee of $20,000 or more might be considered reasonable.
Complexity of the Deal: If a deal involves more complexity, such as multiple parties or legal issues, a higher fee might be justified.
Market Conditions: When the real estate market is booming, assignment fees tend to increase because wholesalers bring more value by locating good deals in a competitive environment.
Another way to consider what is fair is:
The 10% Rule: Many wholesalers aim for about 10% of the purchase price as their assignment fee. So if you've got a house under contract for $100,000, you might shoot for a $10,000 assignment fee.
The $5,000 Minimum: Some wholesalers have a minimum fee they'll accept, often around $5,000. This helps ensure that even smaller deals are worth their time and effort.
The Spread Method: This involves looking at the difference between what you've got the property under contract for and its actual value. You might aim to keep about 30-50% of that spread as your fee.
The Value-Added Approach: Consider how much work you've put into the deal. Did you spend weeks negotiating? Did you solve complex title issues? The more value you've added, the more you can justify charging.
Remember, the key word here is "fair." You want to make sure you're compensated for your hard work, but you also want to leave enough meat on the bone for your end buyer to make a profit too. It's all about finding that sweet spot!
How to Calculate a Fair Assignment Fee
A fair assignment fee should reflect the value of the deal you're bringing to the table. But how do you know what’s fair? Here are a few guidelines to help you calculate your fee:
1. Keep it Proportional to the Property Price
A good rule of thumb is that your assignment fee should be proportional to the price of the property. For example, if you’re wholesaling a $100,000 home, a fee between $5,000 and $10,000 might be fair. However, for a $500,000 property, a higher fee (such as $20,000) could be justified.
2. Consider the Time and Effort Involved
If you’ve spent weeks negotiating, solving problems, and working through paperwork, it’s fair to charge a higher assignment fee. On the other hand, if the deal was quick and straightforward, a lower fee might be appropriate.
3. Check the Local Market
Take a look at what other wholesalers in your area are charging for similar deals. Staying competitive is important if you want to maintain good relationships with buyers and sellers.
Best Practices for Setting a Fair Assignment Fee
Charging a fair assignment fee isn't just about getting the most money possible. It's also about maintaining a good reputation and building trust with both sellers and buyers. Here are some best practices to keep in mind:
1. Be Transparent
Always disclose your assignment fee upfront. If the buyer or seller feels blindsided by a fee they weren’t expecting, it could hurt your credibility and cost you future deals. Being transparent from the beginning sets the stage for a smooth transaction.
2. Justify Your Fee
When possible, explain the value you’re bringing to the deal. If you found an incredible property at a steep discount or navigated a complex situation, make sure the buyer understands why your fee is worth it.
3. Build Long-Term Relationships
Repeat business is key to success in wholesaling. By charging reasonable assignment fees and providing value to both buyers and sellers, you’ll build a reputation as someone people want to work with. This can lead to more deals and referrals in the future.
4. Adjust Based on the Deal
Not every deal is the same, and your assignment fee shouldn’t be either. For smaller deals, consider lowering your fee to ensure the deal closes smoothly. On larger, more complex deals, a higher fee may be warranted.
What Happens if the Fee is Too High or Too Low?
Charging too much for an assignment fee can scare away buyers or leave them feeling like they’re not getting a good deal. On the flip side, charging too little can leave money on the table and undervalue the work you’ve put into the deal.
It’s all about finding a balance—one that reflects the value of the deal while keeping everyone happy.
The Do's and Don'ts of Assignment Fees
To wrap things up, let's go over some quick do's and don'ts:
Do:
Be fair and ethical in your pricing
Explain your fee clearly to buyers
Provide value that justifies your fee
Be willing to negotiate when necessary
Keep good records of all your transactions
Don't:
Try to hide or misrepresent your fee
Charge so much that your buyer can't profit
Undervalue your services
Forget to factor in your time and expenses
Ignore local laws and regulations about wholesaling
Final Thoughts
At the end of the day, determining a fair assignment fee comes down to understanding your market, providing value, and being transparent with all parties involved. Wholesaling can be an incredibly lucrative business when done right, and the assignment fee is just one part of the equation.
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Big and Small Properties is a group of real estate Investors who buy houses and land all over the United States. They specialize in buying, wholesaling, and flipping single, multi-family and commercial properties. They are CASH BUYERS creating a quick and easy selling process that moves with ease and efficiency from Offer to Closing. Big and Small Properties also partners with other experienced real estate investors in buying and selling property. Contact us at (877) 260-5566 or SUBSCRIBE to our blog to be added to our buyers list or to receive our latest blog posts.
Disclaimer: This article provides general information and should not be considered legal or financial advice. It's essential to consult with professionals for personalized guidance.
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