The Assignment of a property is a process when someone who has signed an agreement with the Builder to purchase a property (hereafter referred as 'assignor'). And this original buyer allows another buyer to take the rights and obligations with the Builder. This new buyer is called as an 'Assignee'.
In this assignment process, the original buyer, the assignor, has yet to close the property officially, his mortgage hasn't started, and the title is not transferred to the actual buyers. No possession has happened. An assignment is sometimes also termed 'paper flipping'. This new buyer or the assignee is the party who finally completes the transaction with the Builder, sometimes called vendor or seller.
The Assignment can technically happen on a resale property as well, where the situation of the buyer clients changes and they are looking to assign their firm agreement to a qualified assignee. However, for the most part, you will see this happening with pre-construction projects for high-rise condos and low-rise freeholds.
The Assignment becomes a tremendous tool when the original buyer's (assignor) financial situation changes so dramatically that they are now looking to transfer their obligation with the vendor to the new buyer (assignee).
Reasons why the original buyers might resort to exercising Assignment,
1) Financial Situation - Financial situation of the assignor changes, and they want to hand over their obligation with the Builder (vendor) to another buyer (assignee).
2) Change of Plans - The plans of the original purchaser change for their own living, in terms of where they want to settle and raise a family etc.
3) Capitalizing on the Market – The assignor wants to book a profit on their purchase due to market growth; since they signed up with the Builder.
4) No Closing Costs - They want to get out of their contract with the Builder without committing to the mortgage and paying the land transfer tax to the government.
Let us explore the reason why and when the assignments work for the new purchaser (assignee),
1) They benefit on the purchase price, which would be slightly lower than the ready property available in the market, as the property is still not ready and available for viewing, and it is purchased on paper.
2) The incentive of getting into a brand new property without getting into the long wait for possession.
3) Less competition as fewer consumers are looking for assignments due to their intricacies on HST rebates and development charges we will discuss shortly. Assignment sales also have a relatively more significant deposit requirement, which contributes to the less competition we see here.
Let us go through a couple of scenarios with numbers to make it clear,
Buyer A purchased a pre-construction from Builder for a low-rise freehold 2-storey townhome in Jan 2020 for $485,000; they paid a deposit of 15% to the Builder within one year of signing, amounting to $72,750
Buyer A's personal situation changes, and they want to assign their obligation with the Builder to a qualified new buyer. They list the property on Assignment at $650,000. Buyer A becomes an ‘assignor’.
Buyer B is looking to buy a property in the area, and their broker is able to negotiate the Assignment. They negotiated and agreed on the assignment agreement at $620,000. Buyer B becomes an ‘assignee’.
Similar 2-storey townhomes in the same area, which were relatively newer, are selling at a median sold price of $665k.
The benefit of Buyer B is that they are getting the property for less than the market price and still being a brand new never lived-in property with a 7-year Tarion warranty. They are also receiving a discount on the price of similar spec properties in the area as they are willing to buy it on paper without having a look and feel of the property.
The benefit of Seller A, the assignor, is that he will not be incurring the closing costs in terms of land transfer tax, HST, development charges, furnishing costs for appliances, blinds etc, in the unit. And after not incurring these costs, he is still able to gain profit, which is why he is willing to let go of the entitlement for marginally less than the fair market value.
Now let us discuss on couple of finer things to keep in mind in dealing with Assignment Sales,
HST New Housing Rebate - You are eligible to receive Ontario's new housing rebate if you buy a new house from the Builder, up to a maximum of $24,000. Generally, based on your disclosure, the Builder will take this rebate directly from the government and build it into your purchase price. However, sometimes the builders don't do the same for the new assignee taking over the contract. In that case the assignee needs to come up with $24,000 at the time of completion. And later on, as they are utilizing it for their residence or lease, they can follow the due process and claim it back from CRA. However, when we are readying ourselves to buy an assignment, we should be prepared to take up this additional cost at closing.
Development Charges - The city and local municipality collect fees from the Builder when issuing the development permit. This charge ensures the commissioning of various services in the community as parks, street lights, roads, sewers, community services, paramedic services, police services etc. These charges are generally pre-calculated, and the builders will include them in their offered price. However, with the time elapsed between the actual approval of the permit and the final build, there could be a change in the city's budgeting, and they might ask for more development charges. In the pre-construction contracts, there is generally a capping clause on these charges. For example, suppose a person buys a pre-construction home from a builder with the Development Charges capped at $5,000. This means that if the municipality at the time of completion, comes back with an additional ask of $2,000, the buyer will be bearing this extra cost. If the municipality comes up with $7,000 as the further development charge, the buyer will pay $5,000, and the rest $2,000 will be borne by the Builder.
Deposit amount in the Assignment – Negotiation plays a very important role specially in the Assignment agreements between the assignor and the assignee. Let us understand with an example, supposed the assignor has paid a deposit of $80k to the builder, and the closing is 10 months from the day assignment agreement is being accepted by the parties. Here, the assignor might want to negotiate to take the deposit provided to the builder already from the assignee, as that would be his incentive to let go of the entitlement to the assignee. And they can utilize this amount and invest it elsewhere, as the closing is 10 months away. On the other hand based on the market it could be less than the original delivered deposit as well, if the closing is not far and both assignee and assignor agree on a smaller deposit, the rest would be accounted for at the time of completion. The release timing and payment schedule of the deposit in the assignment agreement plays a major role and is a big factor in the negotiation of a correct assignment agreement. The motivations of either side play an important part in agreeing to the the payment terms of the good faith deposit.
Due Diligence Clause - In terms of negotiating a correct assignment agreement, it becomes critical to put a due diligence clause to get the original APS signed between the assignor and the Builder and get it reviewed by the assignee's lawyer. The solicitor will look into these finer points in the original Agreement of Purchase & Sale between the assignor and the Builder, which might impact the bottom line of assignee as new purchasers. This is critically important as the assignee is taking over all of the obligations which are present in the original APS between the builder and the assignor.
In a traditional real estate resale transaction, two lawyers represent the buyers and the sellers. However, in the assignment sales on the day of completion, there are three solicitors involved: one representing the assignor, the second representing the assignee, and the third representing the Builder (vendor). Based on the documented assignment agreement, funds are distributed between the vendor for the original purchase price, and the appreciation, if applicable, is transferred to the assignor.
Wish you all the very best! Reach out to our dedicated team at Elixir for any queries you have in Real Estate and we will do our best to help.
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