Are you planning to sell your pre construction condo before taking possession? Here’s what you need to know.
What’s an assignment?
When a Seller assigns their interest in a property before taking possession, they are selling the contract they have with the Builder to a new purchaser. When a Seller assigns a property, they are not selling the property (since they do not yet own it) – they are selling their promise to purchase it, as well as the rights and obligations under their Agreement of Purchase and Sale contract. The buyer of an assignment is essentially taking the place of the original buyer.
The Assignor is the original purchaser, while the Assignee is the new buyer. The Assignee is the person who makes the final transaction to the Builder.
Do assignments only happen with pre-construction condos?
As long as there are no restrictions against assignment in the original contract, you can assign any sort of property, whether pre-construction or resale. A buyer of any type of residence can use an assignment to sell their interest in the property before taking ownership of it.
Why would someone want to assign a condo?
In pre construction sales, there is usually a significant time lapse between when the original contract is signed, when the Buyer can move in (the interim occupancy period), and the final closing. During that time, a Buyer’s circumstances may change for a variety of reasons, including a new work outside the city, a new spouse, a new set of twins, etc. What worked for a Buyer’s lifestyle four years ago doesn’t necessarily work at closing time.
Another common reason for wanting to assign a contract is financial reasons. When the original purchaser does not have the cash or cannot obtain finance to complete the sale, it is cheaper to assign the contract to a new purchaser than to renege on the sale.
Finally, assignment sales are popular among speculative investors who purchase pre construction properties with no intention of closing. In these cases, the investors are counting on quick price increases and want to lock in a profit now rather than waiting for the original closing date.
What aspects of an assignment sale are negotiable?
Because the Assignee is assuming the original purchaser’s contract, they cannot renegotiate the price or terms of the contract with the Builder – they are just assuming the contract as it now exists and as you negotiated it.
Most of the time, the Assignee will match the deposit you made to the Builder…
So, if you put down 20%, you may expect the new buyer to do the same.
Most assignment sellers want to earn a profit, and agreeing on a price is part of an assignment sale negotiation. Your real estate agent can advise you on the appropriate pricing, which will determine your profit (or loss).
Builder Approval and Fees
Remember the massive legal document you signed when you made an offer to purchase a pre construction condo? It’s time to take it out and read it.
Your rights to assign the contract were specified in your Purchase and Sale Agreement. While most builders allow assignments, there is normally a cost that must be paid to the Builder (we’ve seen anywhere from $750 to $7,000).
There may be additional requirements as well, the most common of which is that the assignment be approved by the Builder.
Marketing Restrictions
Most pre-construction Purchase and Sale Agreements from Toronto Builders do not permit the sale of an assignment…
So, while the Builder may provide you the ability to assign your contract, you are not permitted to post it to the MLS or advertise it online. This makes selling an assignment extremely difficult… How can people buy it if they are unaware it is for sale?
While it may be tempting to break the no-marketing rule, BE VERY CAREFUL. Buyers who violate the regulations by marketing an assignment may be considered to have breached the Agreement, and the Builder may cancel your contract and keep your deposit.
We do not recommend advertising an assignment for sale if it is forbidden under your contract.
So how the heck can I find a Buyer?
REALTORS who specialize in assignment sales have a database of potential Buyers and investors looking for assignments. Get in touch if you want to be connected with an agent who knows the ins and outs of assignment sales… We know some of Toronto’s best assignment agents.
What are the tax implications of real estate assignment?
Tax advice should always be obtained from a certified accountant, not from the internet.
However, any profit made from an assignment is usually taxable (and any loss can be written off). The new Buyer or Assignee will be responsible for paying any relevant land transfer taxes and HST.
How much does it cost to assign a pre-construction condo?
You will most likely have to pay a real estate commission (unless you find the Buyer yourself) and legal fees in addition to the Builder assignment fees. Because assignments are more involved, legal fees will be more than for a resale property.
How does the closing of an assignment work?
There are two closings in assignment sales: the closing between the Assignor and the Assignee, and the closure between the Assignee and the Builder. The initial purchaser receives their deposit plus any profit (or their deposit less any loss) from the Assignee at the first closure (the assignment closing).
On the second closing (between the Builder and the Assignee), the Assignee pays the remaining sum to the Builder (typically with the help of a mortgage) and pays land transfer taxes. At this stage, title of the property passes from the Builder to the Assignee.
I suppose there is a third closing as well, when the Buyer gets possession of the property but does not yet own it… This is known as the interim occupancy phase. When a unit is ready to be inhabited but not yet ready to be registered with the city, it is in an interim occupancy. Interim occupancy periods in Toronto range from a few months to a few years.
During the interim occupancy period, the Buyer occupies the unit and pays the Builder an amount that is generally equal to their mortgage payment plus condo fees and taxes. Who completes the interim occupation will be determined by the timing of the assignment.
Assignments vs. Resale: Which is Better?
We frequently receive inquiries from clients who are deciding whether to assign a condo they purchased or wait for the building to register before selling it as a regular resale property. “Pre constuction condo or a reseale condo?“.
Advantages of Assigning vs. Waiting
- Get your deposit back and lock in your profit sooner.
- Avoid paying land transfer taxes.
- Avoid paying HST.
- Maximize your return if prices are declining and you expect them to continue to decline
- Sometimes it just makes sense to move on in terms of lifestyle
Cons of Assigning vs Waiting
- The pool of Buyers for assignment sales is much less than the pool of Buyers for resale properties, which may result in the sale taking longer than expected, getting a lower price than if you waited, or both.
- Marketing restrictions are inconvenient and reduce the chances of finding a buyer. What is the market price? If the condo building hasn’t been registered and there haven’t been any resales, determining how much the property is now worth can be hard. Assignment sales typically sell for less than resell.
- Assignment sales can be tricky, so make sure you’re working with an experienced agent and a reputable lawyer.
