Buyers: Is An Assignment Sale A Good Deal For You?
/What is an Assignment Sale?
An assignment is the sale of a contract to purchase a pre-construction property. Simply put - the Seller (Assignor) is selling the contract they have with the builder to a prospective buyer (Assignee). The seller can only do this when the project is over 90% sold, and their original agreement with the builder allows the buyer to re-assign the contract. The building is typically not registered with the government yet, therefore only the contract can be sold and no ownership has been taken.
In the recent years, assignment sales have become more common and higher in demand, but not every buyer is suitable to purchase an assignment. Average condo prices have gone up 27% from August 2016 to August 2019. Assignors who purchased from the builder at 2016 pre-construction market price may get their deposit back with a good profit.
Data source: TREB
5 things to check off before considering an assignment sale:
Do you have Cash Flexibility ?
The pool of buyers for assignments are usually smaller than resale. The Assignee must have at minimum the sufficient cash to pay the Assignor upfront for the deposit(s) paid to the builder, typically this amount is 10-20% of the original purchase price. For example, a condo unit was originally purchase for $300,000 and the deposit paid is 20%, you must have minimum $60,000 readily available. Now this condo is selling as an assignment for $500,000 which means the Assignor’s profit is $200,000. There are ways to negotiate an assignment deal. You can agree on a payment structure, or paying all profits upfront to get a better price. In theory, to buy this assignment, the buyer should expect to have $260,000 cash available, which does not including closing costs (builder’s adjustment costs such as levies).
Are you an End User?
Being an end user to purchase an assignment has advantage over investors. Being an investor may have HST implications on final closing with builder - you will need to pay the HST first and then submit a claim form to the Canada Revenue Agency to get majority of the taxes back. For end users, the builder will claim the HST on your behalf with requirement to pay this upfront.
Investors beware! There is typically an occupancy clause that restricts the owner to lease the unit during interim occupancy. You may lose thousands of dollars with a vacant unit for 6-12 months if its not yourself or an immediate family member living in the unit.
Do you have the Desire to Buy New?
The perception that new is always better. This is not always the case - a reputable builder plays a large role. However, all new buildings require the builder to be members of the Tarion Warranty plan. Depending on the stage of construction, you may have the opportunity to perform colour selection and the pre-inspection delivery (PDI) with the builder. Unlike resale, you have no obligation to accept any imperfections upon delivery of the unit.
Would you like to buy below Current Market Value?
If we have the option to pay less than others, why would we choose not to? Most assignment sales won’t have bidding wars or high competition, even in the most desirable neighbourhoods; as it is difficult to find buyers with the required level of cash flexibility. Sellers understand the limited pool of buyers and often will sell for lower than similar resale units in the neighbourhood.
Do you have Occupancy Flexibility?
For buyers who have the flexibility to move within 6 months - 1 year or longer, assignments may be a good option. Pre-construction sales have its own risks. The most common word in relation to pre-construction is delay, delay, delay. When you take over the contract, you also assume the risks. You must be prepared to move in later than expected if the builder sends you a delay occupancy letter, and there is no recourse.
If your answer is yes to the above, contact me today on how I can help you find the perfect assignment deal!
