If you're familiar with the stock market, then you've probably heard of stock options. In their simplest form, they allow you to buy or sell a stock at a certain price, which can be to your advantage, depending on the view of the market you took and the options you purchased.
When it comes to real estate, you can also get access to options, if you look hard enough. What we want to focus on is something called the right to assign. The right to assign allows you to assign your signed contract to another party who will close on the property.
Why would people want the right to assign? It depends. For some people it offers a hedge against risk. For instance, imagine purchasing a condo in the pre-construction market, knowing that closings won't take place for another two years after contract signing. The right to assign helps you mitigate risk should you not have the means or ability to close on the property. For instance, you may have lost your income stream and are unable to get a mortgage. The right to assign essentially lets you out of the contract. However, you will still have to go through the effort of marketing the property, and you may face several restrictions on how you actually go about this.
The other reason for the right to assign lies in the opportunity to make some serious money. So how does it work? In NYC, this tactic works particularly well in the pre-construction market. Pre-constructions involves any property where you have the opportunity to go into contract on an apartment that has yet to be built, which means that you often have 2-3 years where you'll be waiting to close on the property. The properties are sold with floor plans and visual design. Often sales galleries will also have a sampling of the finishes for prospective buyers.
If you are able to get the right to assign, you essentially own an option to sell on the property. Take for instance a $1 million dollar property. You go into contract and put down 10%, $100,000. The closing is not for another 2 years. In a year, other comps on the market are already trading at $1.4 million. This means you can flip your contract (and assign it) to someone within this price range. For a $100,000 down, you might be able to clear $400,000 in profit, before transaction fees and taxes. You never even had to own the property!
Sounds like a no-brainer, right? So why isn't everyone doing this? It's because the right to assign is incredibly hard to get. Sponsors are not keen to have people competing with their own inventory. Additionally, in many cases there is no benefit for the sponsor to offer this provision, unless of course they receive a cut of the action. Insiders, high-rollers, VIPs and people who purchase higher priced units are also more likely to be able to negotiate for this clause.
The other day I heard a story from an appraiser. He just came from a job at a building that isn't even move-in ready. What was he doing there? He needed to appraise a property that is being assigned. The seller is making $800,000 in profit and never even owned the apartment.