In a market where resale properties get snapped up in a matter of hours and pre-construction projects sell out in a few days, buying can be a challenge. There’s a lot of competition out there, and some buyers have been looking at assignment sales as an additional source of available properties.
What is an assignment sale, exactly?
An assignment is when the original buyer of a pre-construction property (who signed a contract with the builder) sells their contract to someone else before the purchase closes. Essentially, the buyer takes over for the seller in the contract and pays the deposit plus appreciated value/profit.
Assignments happen for a number of reasons. Life changes are a big motivator – a lot can happen in the three to four years it takes to get from initial deposit to ownership. People decide to leave Toronto. They have babies, they get married, they get divorced. Some face financial difficulties that make them unable to close.
Or, in the most common scenario, they’re investors who never intended to close on the property in the first place. A popular investment strategy is to buy in an early release, let the property appreciate, then sell it before having to shell out transfer taxes and HST and getting locked into a mortgage.
The pros and cons of assignment sales
This type of transaction comes with a very specific set of pros and cons for both the buyer and the seller. Here’s a quick rundown:
Buyer pros
You can own a brand new unit without waiting years for it to be finished – buying directly from a builder involves a much longer wait.
There can be less competition. Typically, they aren’t marketed the same way as resales and fewer buyers know about them. The complexity of the transactions shrinks the potential buyer pool even further.
You don't have to worry about a project being cancelled and leaving you in the lurch: most builders don’t allow assignments until the project is almost done.
Buyer cons
You need to have a a good chunk of cash, including all deposits that have been paid to the builder, agent commission, municipal charges, Tarion warranty, closing costs and the assignment fee, which can vary from a few hundred dollars to a few thousand (though some builders waive it as a purchase incentive). And you’ll be paying the appreciated price – not the amount the original buyer paid.
An assignment sale is a lot more complicated than a resale purchase. You need a real estate lawyer experienced in assignments to ensure everything is done right, and a realtor who really understands the assignment market.
Seller pros
If you’re an investor, you can cash in on the profits before the project is completed. Getting cash out earlier means you can reinvest faster.
You avoid paying land transfer taxes, HST and a whole lot of other closing costs.
You don’t have to deal with closing, occupancy, or tenants.
If your life situation changes, it allows you to walk away without penalties (and some profit).
Seller cons
It’s harder to sell an assignment than a resale: the rules around marketing are different than for resales, so the pool of buyers is smaller.
There are limits around when you can sell: a certain percentage of the development has to be sold before a developer will allow it.
Not all builders allow assignments, and even if they do, they can refuse the sale.
The builder could cancel incentives like capping of development charges and design/upgrade credits, which increases the price and cuts into profit.
Greater complexity means higher legal fees.
An experienced agent is a must-have
REALTORS® who understand assignments can hel you navigate the complexity of this type of transaction. And they can help you market it, despite any limitations that might be imposed by the builder: they can leverage their networks to spread the word about available units, find interested buyers and connect the two.
“Agents can source assignments through a mixture of Kijiji ads, personal networks and semi-private networks like Facebook groups who screen their members,” says Konrad Gloge, Sales Representative. “Builders have the power here: if you list an assignment on MLS and they haven't agreed to it, you’ll be in breach of contract and you could lose your deposit, which is a pretty compelling incentive not to list. That’s why working with a well-connected agent is a must.”
Assignments can be daunting, but with a good lawyer and a knowledgeable realtor, they can be a great financial move, helping you profit on your purchase before it closes or get into a great new place faster.