Ever think about buying or selling a preconstruction deal before it’s ready? Known as an “assignment”, here’s the pros and cons of flipping (or buying) assignments.
WHAT IS AN ASSIGNMENT?
I guess we should start off by explaining what an assignment is. Imagine that a purchaser enters in to an agreement to buy a new construction property a few years ago before the building even starts building, and then turns around and sells it to someone else before the completion date in the original agreement. In Toronto this property is most likely a pre-construction condominium purchase, but an assignment can also apply to new construction freehold homes or even commercial properties. Or, it could be an assignment of a resale agreement before the closing date. The only thing that is common is that the property has not been registered on title to the original purchaser, and the original purchaser (known as the assignor) is selling their right to close on the property to the new purchaser (known as the assignee).
INTERIM OCCUPANCY vs FINAL CLOSING DATES
The most common case of assignments are pre-construction condos in Toronto. There are two dates you should pay attention to, one is the interim occupancy date, and the other is the final closing date. The former is when you get your keys, and the latter is when you get your mortgage.
However, the only date that matters for assignments is the final closing date.
Here is a list of pros and cons of buying or selling an assignment:
It may be tempting to cash out, take the money, and run. However, please consider the following before making your decision to sell prior to completion.
You will realize instant gains, and the best part is that it's leveraged. Your initial deposit will be around 20%, sometimes even less depending on the project and depending on when you decide to assign the contract. Your selling price will be based on the market price of the overall asset.
No headaches of getting financing, because let's face it, it's getting increasingly difficult to get a mortgage in today's market.
You don't have to worry about market fluctuations, as who knows what will happen to real estate prices by the time the building registers.
No surprises from the developer. Since you bought off plans, often times it is difficult to envision what the final product will be. Perhaps your view is blocked by an unsightly neighbouring building, or that you didn't get what you were promised. Maybe you expected the square footage of the property to be larger than in real life.
Let the next buyer worry about the extra closing costs. True, you or your REALTOR was smart enough to cap your development charges and levies at the time of purchase, but there are always extra closing costs that you don't expect such as HST, land transfer taxes, legal costs, and all those minor fees and utility deposits that you did not expect.
Be cautious of any tax implications that you may have. Remember that an assignment of the Agreement of Purchase and Sale is really like selling the contract between you as the original purchaser and the developer. This may be considered business income in the eyes of the Canada Revenue Agency, which is fully taxable unlike the capital gains exemptions that you get from the sale of real property. The CRA is aware of this practice from condo flippers that do not declare the income, and is cracking down on individuals not reporting it.
You may be selling yourself short, as the property values will likely increase after the building is registered and vacancies are all absorbed. There won't be any directly comparable properties to base the asking price on, because nothing else is listed. You may have to use indirect comparable properties, such as units in other buildings or houses in neighbouring developments.
It may or may not be mentioned in an amendment to the Agreement of Purchase and Sale at the original terms of the purchase, but the assignment fee may sometimes outweigh the point of this assignment altogether. That's even if the developer allows you to assign your purchase in the first place.
If the new purchaser isn't able to close on the property, you may still be on the hook to close. Chances are that you already have your money in hand since your awesome REALTOR has negotiated your original deposit and any profit out of the deal already, but technically you are legally bound to the contract in case the new purchaser is nowhere to be found at the final closing. In this case, you probably wouldn't be prepared to close either on such short notice.
You may be limited on how you can market your property for assignments. In the case of preconstruction agreements, the developer likely prohibits the advertising of your property for sale on the MLS or anywhere else, because you may be competing with their remaining inventory. It's probably in the second or third page of your agreement. Any violation of these terms can be considered a breach of the original Agreement of Purchase and Sale. I have yet to see a developer terminate an agreement due to this, usually they give you a warning. However, you don't want to be the first case of this. Of course, it will come down to a legal battle, but it's black and white.
Purchasing an assignment from someone else might be a worthwhile endeavour. Many of the pros and cons may mirror the opposite of those mentioned for the seller already.
It can be cheaper than the current market value of a similar resale property, as the assignor (the seller or the original purchaser) would need to give an incentive to purchase all the uncertainty that comes with buying something that probably isn't built yet. Also, there probably has been a (significant) increase in property values since the original purchase, so there may be some room to negotiate. However in a seller's market or a high demand property, this probably isn't the case.
Perhaps it's a good deal, if the assignor (the seller or the original purchaser) is under a distressed situation. Maybe you can negotiation a win-win situation, where you get it at a great price and they get bailed out of a sticky situation.
It will be a brand new property, as it wouldn't have been lived in. Who doesn't love that new car smell?
Also, new properties have the newest building technologies. Floor-to-ceiling glass, state of the art appliances, home automation, all that sexy stuff.
If you need a longer closing, this may work out in your benefit. Usually assignments are sold well before the final closing date.
Maybe you're not finding what you need on the resale market, this might be another avenue to expand your search in to.
It can be cash intensive, as any smart assignor (the seller or the original purchaser) will want their original deposit and their profit upfront. This can require a large amount of cash required to close, as you won't be able to get a mortgage until the final closing date. Almost all lenders would want to secure their loan on title, but there is no title to secure it to when it is still under the interim occupancy date.
There is always the risk that the developer could cancel the project. If this happens, then the developer would refund you back the original deposit with maybe some small interest, and you would be left to chase the original purchaser back for the hefty profit that they may have already spent. It doesn't happen often, but if it does then you might wind up in a wild goose chase.
You may not get what you expect. Unless you're experienced from buying from plans, the final product may be smaller than what you actual expected it to be in real life. Or there may be an outside influence that couldn't possibly be shown on the plans.
You will have to inherit all the extra closing costs, such as development levies, utility hookups, etc. Also, if your REALTOR wasn't experienced enough to know that you have to hold back funds for property taxes from the day that the original purchaser took occupancy before final closing, then you may be left chasing them down for that period of time when you finally get your retroactive tax bill.
You don't have any resale data to compare to, so you may be buying on speculation. Will the property values support the new purchase price once it's actually built?
You might open yourself up to a changing market because of the length of time it can take to final closing. That can be a good or a bad thing, depending on which way the market goes. If you're looking for a interest rate hold, most banks don't hold their rates for more than 3-6 months (we have a bank that will hold it for much longer), so you may open yourself up to higher interest rates. Or prices may drop, so you might find yourself having to put a larger than expected down payment.
BOTTOM LINE: CONSULT A PROFESSIONAL!
If you're still interested in buying or selling an assignment, make sure you reach out to a specialist that can walk you through your personal situation. As you can imagine, it can be quite complicated as there are many things to consider. Let us structure a deal to protect you and look out for your best interests! To learn more, please drop us a line.