Everything You Need to Know About Assignment Sales
Assignment Sales are one of the best ways to get into the Toronto Real Estate market. With the number of pre-construction condos nearing completion, you may see this term quite often when looking for real estate.
Assignment sales are not a traditional transaction, and many careful steps need to be taken to ensure both the seller and buyer are protected. There is also money to be made, so if you’re a novice investor, or someone who is in the pre-con market already, our advice about Assignment Sales and how they can work for you will take you and your investment dollars further.
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What is an Assignment Sale?
An assignment sale is a type of real estate transaction that’s typically focused on pre-construction properties. The original buyer of a property allows another buyer to essentially take over the original buyers’ rights and obligations of the pre-construction Agreement of Purchase and Sale that they have with the developer. This takes place before the original buyer closes on the property or takes possession of it. The buyer of an assignment sale completes the deal with the seller/developer.
Even though this type of real estate transaction can take place with any type of property, it’s most common among pre-construction condos.
Reasons for Selling on Assignment
Pre-construction condos are typically sold several years in advance of the building being completed. During the time between purchase and occupancy, a lot of life changes can happen for buyers. Perhaps you’ve had a great job offer outside of the city, or you’ve recently married and are planning on starting a family. A condo that originally worked at the time of purchase may no longer be suitable after two to three years.
Another reason for selling on Assignment centres around finances. If the purchaser has found themselves in a situation where they can no longer make the deposit payments, or even close on the suite upon completion, they may find themselves in the situation where they have to sell.
Investors also use Assignment Sales as a strategy for making profits based on the quick rise in appreciation of a certain neighbourhood or even the demand for a specific type of suite.
How Assignment Sales Work
When purchasing an Assignment Sale, there are a number of items that you need to be aware of – even more so than with a traditional pre-construction purchase. When a condo is sold on Assignment, the seller is usually looking for a purchaser who can provide a purchase deposit equal to what the seller is currently out of pocket as the assignment sale deposit. Any upside of the sale of the assignment can be paid to the seller based on the negotiated terms of the deal.
Advantages of Selling on Assignment in the Toronto Condo Market
You Can Sell if You Need To
Pre-construction condo purchases take place many years before the building is developed and ready to occupy. During these 2-3 years, lifestyle changes. Perhaps you purchased a small 1-bedroom suite, but during the development phase you’ve married and are expecting to start a family.
Perhaps you’ve secured a job out of province or are moving to another country – selling on assignment puts you in a situation where you don’t have to fulfill your obligation to close on the property due to your changed living situation.
Avoid Closing Costs
Closing costs on a new condo can be significantly more than the closing costs on a typical resale. Always consult your lawyer and your accountant for what you can expect in terms of closing costs, especially if you are purchasing a condo that will not be your primary residence.
Selling by way of assignment means you pass all these closing costs on to the buyer.
Winning in a Hot Market
If pre-construction investing is in your wealth strategy plan, using assignment sales to win is a no-brainer. The market has been successful for many first-time investors, and signs point to a continued strong pre-con market.
By selling on assignment, you’re able to invest with your deposit, and sell prior to closing without being greedy, yet still making a better return on your deposit money than most other investments. Selling your pre-construction contract gives you the advantage of reinvesting your money again and again with a steady, predictable return.
Advantages of Buying an Assignment Sale Condo in Toronto
You Can Purchase a New Condo for Less
By buying a new condo on assignment you’re likely purchasing a product that’s been sold out for quite some time, at a price that’s likely no longer available. The price per square foot should ideally be less than today’s resale prices. Not only are you able to get a brand-new condo but you’re able to get it for a price that no longer exists in today’s market.
Buying on Assignment Gives Buyers the Advantage
After construction begins, some investors will want to sell their suites on Assignment in order to cash out quickly. This then creates inventory in a particular building, giving potential buyers a number of suites to consider. Buyers have more to choose from, and time is on their side when it comes to decision making. Sellers are usually motivated to negotiate because they either need their initial output of cash, or need to sell prior to the condo’s registration date.
Built-In Equity
The main reason buying a pre-construction condo is so appealing to both end users and investors is because of the ability to build equity as the condo is being built. When a buyer is forced to or opts to sell on Assignment, they are typically OK leaving some of the equity that the condo has earned on the table to get them out of having to close on the unit – this value is then there for you to inherit.
5 Tips to Consider Before Buying an Assignment Sale
Agreement of Purchase & Sale Cannot Change
It is critical to work with a lawyer that is experienced with the ins and outs of Assignment Sales. The Agreement of Purchase and Sale that is done with the developer and the original purchaser and cannot be changed. So, as the buyer, you will be inheriting that agreement as your own, so ensuring all of the right clauses and caps are included in that document is incredibly important.
Use a Seasoned Real Estate Broker
Always use a real estate broker when purchasing an Assignment Sale. Many buyers think this is a straightforward transaction, but that couldn’t be further from the truth. It’s more complex than any other type of residential transaction. The paperwork is more involved and there are a number of clauses and conditions that should be going into your offer when purchasing an Assignment Sale that only a seasoned broker and lawyer will know about.
Assignment Sale Offer Conditions
When purchasing a resale condo or house, there are sometimes conditions that are associated with your offer for your protection – things like financing and home inspection or status certificate. Sometimes there are no conditions to make your offer more appealing in the case of competition.
When buying a condo on Assignment, we ensure several conditions are put into each offer, as this is a very different type of transaction. Some of the conditions we include are:
- Developer consent of the assignment sale
- Verification of deposit paid to developer to date
- Verification that the seller has the right to sell on assignment
- Verification that the seller is not in default
These are just some of the conditions that should be included in the offer to purchase an Assignment – there are many others we typically include as well, to ensure our buyer is protected.
Payment Structure
When buying a pre-construction condo in Toronto, the developer usually asks for a deposit of anywhere between 15% to 20%, spread out over a certain number of days/years. Depending on what phase the development is at upon making your Assignment Sale purchase, you will pay the original purchaser (the Assignor) the deposits that have already paid to the developer to date. The remaining balance you will need to pay to the developer according to the timeline that is included in the agreement of purchase and sale. This could be up to 15-20% upfront.
Our biggest piece of advice to anyone purchasing an Assignment Sale is to NOT pay the seller any of the upside profits they are looking for until occupancy of the unit. This is different than closing, but it’s a condition we insist on. There is far too much risk on the buyer of the Assignment to pay any upside money out of pocket prior to the unit’s occupancy.
Closing Costs
You will be responsible for all closing costs when the building is registered with the city. Closing costs include:
- Land Transfer Tax
- Development Charges
- Utility Connection Fees
- HST
- Legal fees
This is also the time that your mortgage will officially begin.
Keep in mind, if you plan to use this pre-construction property as your primary residence, you qualify for the GST/HST New Housing Rebate. Investors who are renting out their condo will need to pay for this fee upfront. Your lawyer/accountant can file for a GST/HST New Residential Rental Property Rebate, refunded approximately 4 to 6 weeks later, provided you have a one-year lease in place.
As you can see, Assignment Sales can provide for major benefits for both buyers and sellers. You’ll get a brand-new condo without the years-long wait that typical pre-construction buyers have to endure. Don’t shy away from buying an Assignment Sale – just be sure to work with brokers like us who have an exceptional, long track record of successful transactions.
If you’d like to learn more about how Assignment Sales can work for you, and what projects are on our hot list, simply click below to fill out our form and we’ll be in touch via email right away.