What Is An Assignment Sale?
Assignment sales are becoming more prevalent with all of the new construction going on in the province, particularly in the GTA. What does it mean?
Imagine you purchased a property that hasn’t been constructed yet. It could take years before you move in, and your life could change significantly in the meantime. What happens if you no longer want or need the home or condo that you’ve committed to purchasing?
That’s Where Selling On Assignment Comes In
An assignment of an Agreement of Purchase and Sale with a builder is when the existing Purchaser (referred to as the Assignor) decides to sell their right to purchase the subject property to someone else (a new Buyer, referred to as the Assignee) before they close on the purchase with the builder.
It’s a transferring of the rights to fulfill the contractual obligation with the builder from the Assignor to the Assignee who will be the new purchaser and subsequent owner of the property. An assignment sale takes place before the title (ownership) has been transferred.
Why Assignment Sales Can Be Tricky
Most builders won’t allow an assignment unless the build is nearing completion or even in the occupancy period. It varies on what the builder’s rules are pertaining to assignments, if they allow them at all.
You can find out by reading the original builder purchase agreement and checking in regarding any updates as to whether they’re ready to allow assignments to take place.
Any kind of real estate transaction can get complicated, but knowledge of the market will help you. Here are some of our other topics you might want to know about:
- Realtor® Red Flags You Don’t Want To Ignore
- Buying an Income Property? Here’s What To Look For
- How To Help Your Children With Real Estate Investing
When selling an assignment, the Assignor seeks to recover the deposits they’ve paid to the builder, which is typically 20% of the original purchase price on the builder’s agreement. Plus, they will be owed the difference between their original purchase price and the current market price.
In an ideal scenario for the Assignor (original purchaser), the full payment of funds owing from the Assignee (new purchaser) is usually due upon the assignment closing date. This is the completion date of the purchase between the Assignor and the Assignee. It could be within 30 – 60 days from the accepted offer or until the builder provides the approval to assign and the appropriate documents are completed between the parties to the transaction (Builder, Assignor and Assignee) to transfer the purchase of the property to the Assignee.
The assignment closing date is not the occupancy date or the builder closing. It’s a separate agreement between the two parties for the assignment purchase.
A Simplified Breakdown of an Assignment Sale:
- The original purchase price was $450,000
- The Assignor paid a 20% deposit to the builder, which is $90,000
- Over time, the value of the property has grown and the parties have agreed to a current market value purchase price of $580,000, an increase of $130,000 from the original purchase ($580,000 minus $450,000)
- The Assignor wants the recoup their original deposit, $90,000, plus the difference in value, $130,000.
- The total amount of funds owing to the Assignor from the Assignee in consideration of the Assignment agreement is $220,000
- The Assignee is required to close on the purchase with the Builder based on the original purchase price, which is separate from what they would owe the Assignor to buy the property from them under an assignment agreement
When Do You Have to Pay?
As with purchasing any property, few people have the available capital to pay everything upfront.
Sometimes, the Assignor may agree to receive a partial payment upon the assignment closing date. The remainder is then due on the final closing and can potentially be rolled into the Assignee’s mortgage.
If the Assignee has the funds and agrees to pay upfront, the Assignor in some cases may allow for some negotiation on the assignment purchase price. Since the Assignor no longer has to worry about receiving payment, less risk is involved.
What Are the Pros of Buying on Assignment?
- It allows you to buy a brand new product in an otherwise sold-out development
- You can obtain the property at ‘today’s market price’ before housing prices increase
- Some Assignors may be motivated to sell for personal reasons, which could mean getting a better purchase price
What Are the Cons of Buying on Assignment?
- The closing costs are higher. When you buy on assignment, you take over all terms in the original purchase agreement. You’re now responsible for the builder’s closing costs, including developmental charges, levies and other miscellaneous fees, which can amount in the thousands. This is in addition to the Land Transfer Tax and real estate lawyer fees which can be a bit higher for an assignment sale as it requires the lawyer to review the original builder purchase agreement in addition to advising on the assignment agreement which is more complex then a standard resale purchase and sale. When you buy resale, you pay the land transfer tax and the real estate lawyer’s fees for a standard real estate purchase. Closing costs cannot go into the mortgage, so you need the cash upfront.
- You may have to pay HST on the purchase. Sometimes, the builder includes the HST in the purchase price and applies for the rebate on your behalf. However, you are not eligible for an HST rebate unless the purchase will be your principal residence. Taxes can get complicated, and you should consult with a lawyer and accountant to protect yourself.
- You typically will require more money for the purchase upfront because of the amount the Assignor is looking to recoup.
- Not all lenders will approve the mortgage financing based on the new purchase price for an assignment purchase, although today most of the major banks do. You will need a mortgage pre-approval specifically for the assignment purchase and as per the terms that the builder requires for the length of time the mortgage approval is valid, which is typically a longer period than a typical mortgage pre-approval
- Your choices are limited when buying on assignment. You can not choose the floor height, exposure, or preferred floor plan layout.
- You do not get to choose the finishes. You have to accept whatever colour palette and style of finishes the Assignor selected. However, the builder often has a design team who would have had a few preselected colour pallette options for the original purchaser to have chosen, so you’ll know that the finishes will complement each other and not be unappealing otherwise
Once you’ve bought your condo, one of the first things you’ll want to do is decorate and make it your own. Here is a simple idea to get you started!
Who Should Buy On Assignment?
In our opinion, an assignment is good for those who have enough cash to make this type of purchase without financial strain. Buying an assignment may allow you to get a pre-construction property that may otherwise be unavailable.
You’ll also likely get a better price than what the market value may be by the time the build has been completed and is registered.
If you’re thinking of buying or selling on assignment, it’s important not to try to do it alone. It doesn’t have to be intimidating. In fact, buying or selling on assignment could work well given your personal circumstances. Your best resource is to have a Realtor and lawyer who are knowledgeable about pre-construction and assignments.
Do you have more questions about buying or selling on assignment or real estate in general? You can set up a meeting with us here, and we can point you in the right direction.