Last month we took you through what it means to buy a preconstruction property, and mentioned assignment sales as what happens if the purchaser of an incomplete unit wants to hand off that property to another party. Today we will be taking a deep dive into assignment sales, and how they can be an excellent tool for investment in Toronto’s booming real estate market.
What is an Assignment?
Here’s where we get technical. An Assignment of contract occurs when one party to an existing contract (the “Assignor”) hands off the contract’s obligations and benefits to another party (the “Assignee”.) Ideally, the Assignor wants the Assignee to step into his position and assume all of his contractual rights and obligations.
In preconstruction real estate, an Assignment of Purchase and Sale occurs when the original purchaser (Assignor) from the Builder agrees to allow a new purchaser (Assignee) to take over the contract with the Builder. The original purchaser does not have to take possession or title the property and the new Buyer takes over and completes the property purchase with the Builder.
Why Do People Assign?
There can be any number of reasons a purchaser may choose to hand off their obligations. They may be flipping the property for profit, or rethinking their decision due to government regulations such as new mortgage rules, interest rates, and qualification standards. Reasons can also include sudden life changes that alter plans, like marriage, a death in the family, children, etc. Assignments add the option of flexibility which can be sorely needed while under a contract that takes years to fulfill.
Benefits of an Assignment
For the Seller, or Assignor, assignments allow a faster return of deposit (or return of investment). Most assignments require that all of the Assignor’s initial deposit to the Builder be returned at the time the Builder executes the assignment. This frees up the Assignor’s deposit for other investments and avoids the long wait until final closing.
The Seller also avoids a number of fees, including Builder closing costs, Tarion fees, and land transfer taxes that come into effect when the building is registered. They also avoid carrying costs such as maintenance fees, property taxes, and associated mortgage payments while waiting for the unit to sell after closing.
If you received a government GST/HST rebate on your purchase, while assigning you may not have to pay it back to the Builder – Consult a tax professional with regards to potential GST/HST on increased unit value. Individuals who do not intend to occupy the unit on closing are required to pay this rebate back to the Builder. Investors who plan to rent the unit out for at least one year can claim the HST back from the Government but would still have to come up with this significant amount on closing with the Builder.
For the Buyer, or Assignee, this is a great way to purchase a brand-new unit within a few months of completion, thus avoiding the risk of the project being cancelled, as is the danger with preconstruction purchases. You also do not need to wait nearly as long for the project to be complete.
Your brand-new home comes with Tarion warranty, and depending on the point in the project the assignment is completed at, you may be able to still select your ideal finishings for your unit with the Builder.
The Buyer can also receive a price discount over current properties on the market. This is a great way to build equity in the unit as prices typically go up once the building is registered and condos are offered on the resale market. Sometimes the Buyer can take advantage of the deposits made by the Assignor and may be able to put a lower deposit, especially if the unit is in occupancy and close to final closing.
With many benefits to both sides of the equation, assignment sales can be a great option for a variety of situations, both for investment purposes and for prospective home Buyers.
Risks Associated with Assignment Transactions
With all of these perks, one must assume there are always risks to consider. A good Realtor® and a knowledgeable lawyer can help you navigate these with ease, but it is important to know what you’re getting into.
When buying as the Assignee, you take on all the terms and conditions of the original Agreement of Purchase and Sale contract. If the original Buyer did not get their lawyer to review the terms to make sure things such as levies were capped, then those risks are passed on to you. An Assignee can protect themselves by making sure the assignment agreement has a clause that makes your offer conditional upon your Lawyer reviewing the original Agreement of Purchase and Sale.
The Assignee is also responsible for all costs associated with purchasing a brand-new unit: Tarion Warranty fees, Builder fees, development levies, utility connection fees, and contribution to the Condo Board reserve fund.
For the Seller (Assignor), risks include responsibility for any assignment fees charged by the Builder. In the event that the Buyer (Assignee) can’t close the transaction, then the Builder may request that the Assignor close as per the terms of the original Agreement of Purchase and Sale.
The Builder will also stop communicating with the Assignor and deal exclusively with the Assignee once they have agreed to and executed the assignment agreement. This can make it difficult for the Assignor to get important updates. It’s therefore important that the Assignor’s lawyer keeps in touch with both the Builder and Assignee’s Lawyer.
It is also important that the Seller speak with a tax professional to determine tax implications if it is determined that the primary intent of the Assignor was to flip the unit for profit.
With this information in hand, you will be better equipped to understand the benefits and risks associated with assignment sales, and as long as you chose your Realtor® and lawyer wisely, you should have no problem navigating this tricky type of transaction.
Envision Realty specializes in assignment sales and we have plenty of experience with them. Feel free to reach out to us for any questions you may have, or if you’re thinking of pursuing an assignment sale or purchase of your own. We’d be happy to help!