What is an assignment of a condominium purchase?
An assignment occurs when a condo buyer wishes to re-sell his/her interest before taking possession. In other words, the buyer sells the contract with a developer and “assigns” it to a new purchaser. The buyer of an assignment is essentially stepping into the shoes of the original purchaser. It’s something like buying a stock: the buyer is simply purchasing the paper asset.
Who has the right to assign?
The builder has the sole right to approve whether the original purchaser can “assign” the interest in the property to a new purchaser. In many cases, the original contract will preclude this from occurring. It is critical to ascertain your ability to assign / buy an assignment.
When purchasing a pre-construction condominium, have your agent negotiate upfront a “right to assign” clause in your Agreement.
What is the benefit to the original purchaser to have the right to assign?
There are many benefits: the original purchaser, or “assignor,” avoids land transfer tax, any interim occupancy fees that would be due to the developer, all adjustments that would be due on final closing and the need to seek financing to close the property from a bank (mortgage).
In Ontario, there are two closings for a new condominium building: (1) interim occupancy and (2) the final closing. Essentially the final closing occurs when the building is registered, and individual title is passed onto each owner.
When should the original purchaser consider assigning an agreement?
a)When the value of the property has increased significantly from the time of purchase, and the buyer is happy with the gain and wishes to “cash out”; or
b) When the property is in high demand in the current market; or
c) If the buyer’s life circumstances have changed since the condo pre-construction purchase. Frequently, it can be four or five years between the time of purchase and the final closing.
What benefit is an assignment to the “new purchaser”?
The “new purchaser,” or “assignee,” is able to purchase into a development which is “sold out”.
Normally assignments happen when the unit is already close to completion and one can move in relatively soon, rather than have to wait the years it takes to build.
The assignee may not have been in the market when the development was first launched and marketed.
The assignee now gets to see what he/she is buying, vs buying from floorplans on paper.
What should an assignee keep in mind when choosing to purchase an assignment?
The assignee will have to come up with the full deposit amount that the assignor has paid to the builder, along with the difference between the original purchase price and the assignment price. This amount can be substantial.
For example, if the original purchase price was $500,000 and the assignment price is $800,000, the assignee will have to come up with original deposit (normally 20%) and the $300,000 difference, which is the assignor’s profit
There will be a period of possibly 6-12 months before final closing, where the assignee will pay a phantom mortgage to the builder, or what is known as an interim occupancy fee. This amount will include: builder construction financing costs, monthly maintenance costs, and monthly property taxes. Once the building is registered, the occupancy fee ends, the final closing takes place, and the buyer starts to pay the mortgage and the usual monthly amounts that would be payable with any other condo.
The assignee will have to pay land transfer tax (the same as on any real estate purchase transaction) and pay all adjustments as stated in the builder agreement. It is important to be aware of what those costs are. For example, a builder has to pay to support new schools and municipal infrastructure. That proportionate cost is passed onto the condo buyers.
Where does the opportunity lie for an assignee in today’s market?
The original purchaser may not want to, or be able to, close on the property and prefers to assign, possibly at a price below current market value.
Please contact us to find out more on how assignments work and whether they make sense for you.