What is an Assignment?
An assignment is when an original purchaser (Assignor) decides to sell their interest in a property before they take possession to a buyer (Assignee). The buyer is essentially purchasing the contract that the original purchaser had with the builder. The contract, otherwise known as, the Agreement of Purchase and Sale, will include rights and obligations that the new buyer must meet as well.How Does an Assignment Work?
As a buyer, one of the most important things to consider before agreeing to an assignment sale is if you have available funds to do it. When you purchase a condo via assignment, the biggest difference vs. a resale is usually the increased amount of upfront cash you will need to close. This is due to the Assignee paying the Assignor their original deposit + any profit negotiated. Most sellers of assignments are looking to make a profit, so it is up to you and your Realtor to negotiate a price that all parties can agree to. Let’s look at the deposits more closely.2 Assignment Scenarios:
Scenario 1:
You have been offered a condo via an assignment sale where the original buyer has already put down a 20% deposit on a pre-construction condo which is 2 years away from being completed. The seller (Assignor) is offering the condo to you for $350,000 but requires his deposit and profit upfront. Two years ago, the original price to purchase that condo was $275,000, with a 20% down payment ($55,000) that the original buyer has already deposited with the builder. You agree to purchase the unit from the seller (Assignor) for $350,000. What this means is that you will purchase the right to assume the contract by giving the seller their original deposit $55,000 plus a premium of $75,000 for the right to take over the contract. The Assignee pays a total of $130,000 and in return is able to close on the property at the original sales price of $275,000. Most people don’t have that kind of money lying around and with so much money required upfront, this kind of assignment sale is not for the typical first-time home buyer who is trying to keep upfront costs to a minimum. This type of scenario rarely happens as buyers rarely have that amount of cash available to them.Be Prepared to Pay Two Upfront Down Payments
- The first deposit is the total down payment that the original buyer paid to the builder (typically 15 – 20% of the original purchase price).
- The second deposit is the difference between the current asking price (the new purchase price of the condo) and the original purchase price from the builder.
Scenario 2:
Let’s look at an example of how an assignment sale might work if the seller (Assignor) does not require their money upfront. A buyer purchased a pre-construction condo 4 years ago and their unit is completed and the building is about to register, which means that they will have to “close” on the property and get a mortgage. Unfortunately, the buyer’s current financial situation is not good and they start exploring the option of “assigning” the contract, or in other words “selling their right to purchase the condo to someone else (Assignee). You hear of an excellent opportunity to purchase a condo from your Realtor and agree to purchase the condo. In order to get the right to purchase the unit at $275,000, you would have to pay a premium. This premium is negotiated between Assignor and Assignee and their designated agents. You hear from your Realtor and find out that the seller (Assignor) wants to sell the unit for $350,000. That means that the Assignor wants $75,000 for the “right” to assume their original contract. $350,000 – $275,000 = $75,000. You agree to purchase the unit from the Assignor for $350,000. When the building has registered and it is time to close, you will be purchasing the unit from the developer for $275,000 but will give the additional $75,000 from your mortgage to the Assignor.Payments in this scenario
- Your initial payment is to the assignor for the total down payment that the original buyer paid to the builder. In this case, $55,000.
- The second payment is the difference between the current asking price (the new purchase price of the condo – $350,000) and the original purchase price from the builder ($275,000). At closing, you will pay $75,000 from your mortgage to the Assignor.
Seller Must Get Builder’s Consent First
In any assignment sale, one of the first things to find out before agreeing to it is to see if the builder has given consent for the assignment sale. Almost all builders will need to approve an assignment prior to any assignment sale transaction. Most builders will also require an “assignment fee” that is typically paid by the original buyer.Getting a Mortgage
When purchasing a condo via assignment, most builders will only approve the assignment if the new buyer is able to provide a mortgage pre-approval letter or a Proof of Funds showing that they are able to purchase the property in full and therefore can complete the sale. If a mortgage is still required, buyers will apply for a mortgage based only on the original contract price minus the down payment that was already paid to the builder as that is the only amount you are eligible for.Three Closing Dates
Officially, there are only 2 closings in an assignment sale, but the 3rd closing date is equally important if you have purchased an assignment prior to the building being occupied.- The first closing is the assignment closing between the Assignor (original buyer) and the Assignee (new buyer). On this date, the original purchaser receives their original deposit + any profit from the Assignee and the Assignee then receives the rights to the original contract to purchase the condo.
- The second closing is between the Assignee (new buyer) and the Builder. This is the Final closing date where the title of the property will officially be in the new buyer’s name and they can start making mortgage payments.
- The third closing date, for those who are purchasing a condo that is able to be occupied, but has not yet registered is called the interim occupancy. Interim occupancy is the period when the new buyer takes possession of the property but does not yet own it. This occurs when your unit is complete and ready to be lived in, but not yet ready to be registered with the city (the reason for this is other parts of the building might not be completed). During the interim occupancy period the buyer pays the builder what many consider “rent” – The fee is actually made up of three parts: interest on the unpaid balance of the purchase price of your condo, an estimate on the municipal taxes for your unit, and a projected common expense contribution to keep the building running. The fee is usually charged monthly and requested in the form of post-dated cheques made out to the developer or vendor.
Tax Implications When Purchasing an Assignment
Buyers who purchase a condo via assignment will be responsible for paying land transfer taxes and HST. Depending on if you are purchasing the condo to live in or as an investment property may determine if you can apply for an HST rebate and get up to $24,000 back. Consult with your accountant prior to signing the paperwork.If you have any questions about an assignment condo call, text, or email me anytime!
