Trying to resell your preconstruction condo before closing? This blog is for you. Assignment sales are more complicated compared to their resale counterparts, but with some guidance, the process is easy.
An assignment sale is a sale where the original buyers of a condo or home resell their contract to another buyer. The most common type of assignment is a preconstruction condo assignment. Preconstruction condo assignments are prevalent because of the time lag between purchasing the home and the move-in date. While condo assignments might be the most popular type of assignment, any real estate contract can be assigned.
Assignments sales are taking off in Toronto. With a booming preconstruction industry, where some projects sell out in days, desperate buyers are turning to assignment sales as a way to get into coveted preconstruction projects.
Every preconstruction contract is different, so every sale is a bit different; you need legal and accounting advice before, during, and after an assignment sale. A real estate agent’s job in the transaction is to find a buyer, negotiate the contract, and coordinate the sale from start to finish.
STEP 1: THE BASICS OF AN ASSIGNMENT SALE
An assignment is when the original buyers of a preconstruction condo or home decide to sell their contract before the home is complete. This differs from a regular real estate transaction because we are not buying or selling a home, rather we are buying or selling an interest in a contract to purchase a home once it’s complete. Essentially, the buyers are taking over the seller’s name in the contract, in exchange for their original deposits and profit.
In resale transactions, the most important parties in the transaction are the buyer and seller, but in an assignment, the builder plays a significant role in the transaction as well. The builder has the right to refuse the new buyer, because the builder and the assignor are the original “buyers” and “sellers”.
Because the builder plays such a vital role in the assignment, you need their permission to advertise the home for sale. You also need their approval once you find a new buyer. Builders will usually wait until they have sold all their inventory before they start allowing assignements, because they don’t want the competiton for buyers.
The timeline of an assignemnt sale is quite usual:
- The first date you need to concern yourself with is the interim occupancy date of the project. That is the date the condo is ready to move into, but before the building is completed and registered with the city. Most assignments happen around interim occupancy.
- The second date to consider is the assignment closing date. This is the date the buyer takes over the contract. Because the builder has to accept the new buyer, we have to make the assignment closing date 5 days after the builder accepts the buyer. It could take anywhere from a few days to a month for the builder to accept the new buyer.
- The last date to consider is the closing date of the condo. Only once the condo is closed is the title produced and transferred to the new buyer. The assignee and the assignor are both heavily invested in the final closing of the deal, even once the contract has been assigned to the new buyer.
The Builder’s Role In Assignments:
There is no benefit to the builder to allow you to assign your condo or home. The right to assign a contract is usually a sales perk builders offer investors when they purchase a condo or home. With that in mind, builders only allow assignments at their convenience and in situations that do not damage their own bottom line. If the developer is still selling units in their project, they will not allow assignments. Developers also have restrictions on when and how you can sell your assignment.
Marketing For An Assignment Sale:
The first step when selling an assignment is to review the details of your assignment. Every contract will stipulate whether or not you can assign the contract, and under what conditions. The most common conditions include a complete ban on advertising, which adds to the difficulty of selling assignments.
Since realtors cannot post assignment sales on realtor.ca or public-facing forums, we have to sell preconstruction assignments within our network. Luckily, there are dedicated groups of realtors who focus on assignment sales.
If your Agreement Of Purchase And Sale with the builder stipulates no advertising as a condition of the sale, advertising your condo for sale can be constituted as a breach of contract. If you breach your contract, the builder can cancel your contract and keep your original deposits.
What Is Negotiable:
Since the contract with the builder is already firm and binding, there can be no changes to that contract. The buyer is merely stepping into the seller’s shoes, in exchange for their deposits and profits. The new buyer will provide the sellers their original deposits back, plus profit, and will take over the contract in its entirety. While it is assumed the new buyers are taking over the contract as is, the builder might amend the contract when an assignment takes place. Some builders are now making incentives and special conditions in their contract non-transferable in assignments, so it’s important to learn exactly what is transferrable to the new buyers.
The most uncertainty in the sale comes once you’ve found a buyer.
Once you’ve found a buyer you need to negotiate a price as well as a repayment schedule. The buyer is going to want to defer paying you all your profit until the condo is complete, while you are going to want all your deposits and profit upfront. It’s industry standard to pay the sellers their deposits back in full once the assignment is accepted by the builder, but the buyer and seller will negotiate when the profit is paid out.
The conditional period in an assignment sale is significant.
After finding a buyer, the first hurdle to overcome is negotiating a fair deal. Once both parties are satisfied with the terms of the contract, we usually make the deal conditional on lawyer’s review. This gives both the buyer and seller a chance to have the assignment contract as well as the original purchase agreement reviewed. Once both parties have spoken to their lawyers and are happy to continue, we put the deal to the developer to approve the new buyer. The deal is made conditional on the developer approving the new buyer, and that condition usually lasts around 30 days. If the developer does not approve the new buyer within the set-out timeframe, the deal will become null and void, unless the buyer and seller both agree to extend that condition.
Remember, the builder can arbitrarily say no to your buyer. In the original Agreement Of Purchase And Sale, the conditions of assignments are usually laid out. They will also stipulate a fee, which can range from a few hundred dollars to cover their legal expenses, to a few thousand dollars.
What Does It Cost To Sell An Assignment:
The major fees when selling an assignment include the builder’s assignment fee, real estate commissions, and potential tax on the profit. Builder’s assignment fees can range from $1000 to as high as $20,000, however most assignment fees are quite reasonable. Some sellers will find that even contracts that advertised free assignment, might have a small fee payable to cover the builder’s lawyers’ fees. Real estate commissions on assignments are paid by the sellers. The assignment fee and builder’s lawyer fee is also paid by the sellers.
The profit earned from an assignent sale might be subject to tax. Only a tax accountant can advise you how best to claim your profits.
How And When The Money Is Transferred
- Once a conditional offer is negotiated between the buyer and seller, the buyers transfer a deposit to be kept in the listing brokerage’s trust account, or in the sellers lawyer’s trust account. The deposit is negotiated between the buyer and seller. Usually, the deposit is around the deposits the sellers have paid to the developer.
- Once the developer accepts the new buyer, and the assignment is complete, the deposit is released to the sellers. From the deposit, the realtor’s commissions are paid.
- On assignment closing, the buyers pay out the sellers the remainder of their profit.
HST in condo assignment sales is a point of stress for a lot of buyers and sellers. HST rebates are available for both end-users and investors, but an assignment sale might make end-users ineligible for the rebate.
End-users: Most end-users never have to worry about the HST or the HST rebates, because the builder credits them and applies for the rebate on their behalf. But… if an assignor lives in a unit during interim occupancy, they make the unit ineligible for the HST rebate. Because of this, many builders now require end-users to pay the HST and then apply for the HST rebate on their own after closing.
Is it better to sell an assignment or wait till the condo is ready?
There are pros and cons to both situations. An assignment sale works for a lot of people who either don’t have the funds to close on the home, or no longer wish to move into it. It’s also popular with investors who purchased the preconstruction condo with no intention of ever closing on it. For all these people, an assignment sale means they can get their money now and move onto their next business venture.
The alternative is holding onto a pre-construction condo that might take a few more years to complete. The closing fees on most preconstruction condos range around 5.5% of the original sale price, and if the home is purchased as an investment there is an HST charge of around $24,000. An HST rebate exists for investors, but it’s only available to those who sign a one-year lease with a tenant. The cost to close, and the hassle of holding the property and of finding a tenant, is a strong incentive to investors to sell their home as an assignment so they can get their money and move into their next business venture.
If you have a preconstruction condo or home that you are thinking of assigning. Feel free to reach out to us for some advice and insight.