An assignment occurs when a Seller transfers their contractual rights and obligations to purchase a property to a new purchaser, before taking possession. Essentially, the Seller is selling their interest in the Agreement of Purchase and Sale contract with the Builder. The property itself is not being sold, as the Seller does not yet own it. The new purchaser, or Assignee, assumes the role of the original purchaser and is responsible for completing the final sale with the Builder. The original purchaser is referred to as the Assignor.
Do Assignment Sales only work with Pre-Construction?
It is feasible to assign any kind of property, whether it is pre-construction or resale, as long as there are no constraints against assignment in the initial contract. Assigning a property permits a home buyer to sell their interest in the property before they actually take possession of it.
Why would someone want to assign a property?
It is not uncommon for pre-construction sales to involve a significant time gap between the signing of the original contract, the interim occupancy period during which the buyer can move in, and the final closing. During this time, a buyer's circumstances may change, such as getting a new job in a different city, getting married, or having children. This means that what may have worked for the buyer's lifestyle when they signed the contract may no longer be suitable when the closing time arrives.
Another reason why buyers may want to assign a contract is due to financial constraints. In some cases, the original purchaser may not have sufficient funds or may not be able to obtain financing to complete the sale. It is often cheaper for them to assign the contract to a new buyer rather than defaulting on the sale.
Finally, speculative investors who purchase pre-construction properties with the aim of making a profit through quick price appreciation often engage in assignment sales. These investors are eager to lock in their profit now rather than waiting for the original closing date.
What can be negotiated in an assignment sale?
The Assignee cannot renegotiate the price or terms of the contract with the Builder because they are taking over the original purchaser's contract as-is, which was already negotiated. Typically, the Assignee will follow the same deposit amount as the original purchaser, such as matching a 20% deposit.
Sellers of assignments usually aim to make a profit, and negotiating the price is part of the process. Your real estate agent can assist you in determining the price, which will ultimately determine your potential profit or loss.
Builder approval fees
It's important to revisit the lengthy legal document you signed when submitting an offer for a pre-construction condominium and thoroughly review it.
Within your Agreement of Purchase and Sale, you should have information regarding your ability to assign the contract. Although many builders permit assignments, they often require an assignment fee ranging from $750 to $7,000.
Additionally, there may be other prerequisites, such as the Builder's approval of the assignment, which is frequently the case.
In Toronto, it is common for pre-construction Agreements of Purchase and sale from Builders to prohibit the marketing of assignments. While the Builder may grant you the right to assign your contract, advertising it on the MLS or online is often restricted. This poses a significant challenge when selling an assignment because potential buyers may not be aware that it is available.
It may be tempting to ignore the no-marketing rule, but caution is advised. Marketing an assignment in violation of the Agreement may constitute a breach, resulting in contract cancellation and forfeiture of your deposit by the Builder.
We advise against advertising an assignment for sale if it is prohibited by your contract.
Not all Real Estate Agents know or understand the complexities of assignment sales, so it is important for you to work with a Real Estate Agent who can guide you through all the important steps. If you want to be connected with an agent who knows the ins and outs of assignment sales, get in touch with me.
What are the tax implications of an assignment sale?
It's crucial to seek tax guidance from a certified accountant rather than relying on the internet (even if it may be tempting).
In most cases, any profit earned from an assignment is subject to taxation, while losses may be written off. The Assignee or new Buyer assumes responsibility for paying land transfer taxes and any applicable HST.
How much does it cost to assign a pre-construction condo in Toronto?
In addition to the Builder assignment fees, you will likely have to pay a real estate commission, unless you find the Buyer yourself as well as legal fees (which are higher as you require a lawyer who specializes in assignment deals. Because assignments are more complicated, you can expect to pay higher legal fees than you would for a resale property.
How does the closing of an assignment sale in Toronto work?
When it comes to assignment sales, there are typically two closings involved: the first between the Assignor and the Assignee, and the second between the Assignee and the Builder. During the first closing, the original purchaser receives their deposit plus any profits or deposit deductions resulting from the assignment sale. During the second closing, the Assignee pays the remaining balance to the Builder, typically with the help of a mortgage, and covers any applicable land transfer taxes. At this point, title of the property transfers from the Builder to the Assignee.
Technically, a third closing can be considered when the Buyer takes possession of the property during the interim occupancy period, which occurs when the unit is inhabitable but not yet registered with the city. Interim occupancy periods in Toronto can range from a few months to several years. During this period, the Buyer occupies the unit and pays the Builder an amount similar to their estimated mortgage payment, condo fees, and taxes. The timing of the assignment will determine who completes the interim occupancy.
The BIG QUESTIONS - Assignment vs. Resale - which one should you do?
Frequently, individuals are contemplating whether to assign the condo they purchased or hold on to it until the building is registered and sell it as a regular resale condo. Here are the advantages and disadvantages of selling your property on assignment.
Advantages of Assigning vs. Waiting:
Retrieve your deposit and lock in your profit faster
Avoid paying land transfer taxes and HST
Optimize your return if prices are decreasing and you anticipate they will continue to do so
Lifestyle - sometimes it's more practical to move on
Disadvantages of Assigning vs. Waiting:
- The pool of potential buyers for assignment sales is smaller than that of resale properties, which may result in a longer sales process, lower selling prices, or both.
- Marketing limitations are frustrating and decrease the chances of finding a buyer
- Pricing - It can be challenging to determine the current value of the property if the condo building hasn't registered and there haven't been any resales yet. Assignment sales typically sell for less than resale.
- Assignment sales can be complicated, so it's critical to work with an experienced agent who specializes in assignment sales and a reputable lawyer.
Always remember to seek advice from an expert, a Real Estate Agent who knows how to work with assignments, an accountant who can advise you on the taxes, and a Real Estate Lawyer who specializes in assignment transactions.
Get in touch with me if you are thinking of buying or selling a property on assignment and we can discuss what will work best for you.