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Pre Assignment Definition Real Estate

What home buyers and sellers need to know about real estate assignments

Helpful Resource

February 11, 2016

What is an assignment?

An assignment is a sales transaction where the original buyer of a property (the “assignor”) allows another buyer (the “assignee”) to take over the buyer’s rights and obligations of the Agreement of Purchase and Sale, before the original buyer closes on the property (that is, where they take possession of the property). The assignee is the one who ultimately completes the deal with the seller.

In other words, an assignment clause allows the buyer of a home to sell the place before they take possession of it.

In Ontario, assignments are more common in pre-built homes and condos than on re-sale properties, but they are possible on any type of trade.

 

Are assignments legal and why do they happen?

When done properly, assignments are legal and can be a useful tool for buyers and sellers. An example of this would be a situation where a buyer’s financial or personal situation changes before closing. Assigning allows them to pass along the contract to another buyer, without backing out of the deal with the seller.

For instance, someone could buy a condo that is still under construction and might not be ready for a couple of years. The buyer’s work or family situation could change during that time, causing them to change their mind about living in the condo they purchased. Another example may be where a buyer runs into financial difficulties to close on an existing house and wants to find another buyer rather than risk the financial penalties that might come with having to try to back out of the deal.

 

Why is there so much attention surrounding assignments at this time?

Recent media reports out of British Columbia suggest that some real estate professionals in that province may have been using assignments to make more money on the deal without telling their seller clients about what they are doing. When there is a registered real estate professional involved in a transaction, they have a number of obligations to their client. Some of those obligations involve disclosing if they have a personal interest in the transaction that goes beyond the commission they stand to earn on the transaction.

The assignment situation in Vancouver appears to be a localized issue, and we haven’t seen evidence of it being prevalent in Ontario. However, we are monitoring closely. If consumers are aware of questionable practices, RECO wants to know about it so we can investigate. Our complaint form can be found here.

 

What are the obligations of real estate professionals when it comes to assignments in Ontario?

Ontario has rules requiring real estate professionals to disclose any personal interest in a purchase or sale. There would also be disclosure obligations if the same brokerage were representing both the buyer and the seller in a transaction and the buyer intended to assign the purchase to another buyer. In this case the brokerage would have to inform the seller. The seller could then make an informed decision about whether to include an assignment clause in the Agreement of Purchase and Sale.

In Ontario, all registered real estate professionals have an obligation to act with fairness, honesty and integrity when dealing with others in a real estate transaction, while protecting and promoting the best interest of their clients. The seller’s representative is expected help the seller weigh the pros and cons of giving the buyer the ability to assign the property to another buyer.

 

What is RECO doing about assignments in Ontario?

RECO is continuing to monitor this issue and if a registered real estate professional breaches the rules, they would be pursued to the full extent of the law. In addition, RECO has asked its inspection team to watch for anything unusual related to assignments.

If you work with a registered real estate professional and feel like they did not look out for your best interests, you can file a complaint with RECO and we will investigate the situation.

 

What about the tax implications of assignments?

RECO advises anyone participating in an assignment to seek the advice of a tax specialist. Generally, assignors can expect to pay tax on any profits they realized from the assignment. Land transfer taxes are paid by the assignee, as they are only due when the sale closes (that is when the property actually changes hands).

 

How can home buyers and sellers protect themselves?

As with any contract, it’s crucial for buyers and sellers to know what they’re signing. Real estate contracts are legally-binding, so getting legal advice can be a smart idea. It’s important to know what each clause means and how it will affect you. Buyers and sellers are encouraged to ask their real estate professional to explain the clauses in the contract.

Beyond contracts, RECO encourages buyers and sellers to do their homework. That means interviewing several salespersons, getting several comparative market analyses to understand what their home is worth and having realistic expectations about timelines, pricing and how the process will work.

Bought a pre-construction condo and looking to sell it before you take possession? Here’s what you need to know.

What’s an assignment?

An assignment is when a Seller sells their interest in a property before they take possession – in other words, they sell the contract they have with the Builder to a new purchaser. When a Seller assigns a property, they aren’t actually selling the property (because they don’t own it yet) – they are selling their promise to purchase it, along with the rights and obligations of their Agreement of Purchase and Sale contract.  The Buyer of an assignment is essentially stepping into the shoes of the original purchaser.

The original purchaser is considered to be the Assignor; the new Buyer is the Assignee. The Assignee is the one who will complete the final sale with the Builder.

Do assignments only happen with pre-construction condos?

It’s possible to assign any type of property, pre-construction or resale, provided there aren’t restrictions against assignment in the original contract. An assignment allows a Buyer of a any kind of home to sell their interest in that property before they take possession of it.

Why would someone want to assign a condo?

Often with pre-construction sales, there’s a long time lag between when the original contract is entered into, when the Buyer can move in (the interim occupancy period) and the final closing. It’s not uncommon for a Buyer’s circumstances to change during that time…new job out of the city, new husband or wife, new set of twins, etc. What worked for a Buyer’s lifestyle 4 years ago doesn’t always work come closing time.

Another common reason why people want to assign a contract is financial. Sometimes, the original purchaser doesn’t have the funds or can’t get the financing to complete the sale, and it’s cheaper to assign the contract to a new purchaser, than it is to renege on the sale.

Lastly, assignment sales are also common with speculative investors who buy pre-construction properties with no intention of closing on them. In these cases, the investors are banking on quick price appreciation and are eager to lock in a profit now, vs. waiting for the original closing date.

What can be negotiated in an assignment sale?

Because the Assignee is taking over the original purchaser’s contract, they can’t renegotiate the price or terms of the contract with the Builder – they are simply taking over the contract as it already exists, and as you negotiated it.

In most cases, the Assignee will mirror the deposit that you made to the Builder…so if you made a 20% deposit, you can expect the new purchaser to do the same.

Most Sellers of assignments are looking to make a profit, and part of an assignment sale negotiation is agreeing on price. Your real estate agent can guide you on price, which will determine your profit (or loss).

Builder Approval and Fees

Remember that huge legal document you signed when you made an offer to buy a pre-construction condo? It’s time to take it out and actually read it.

Your Agreement of Purchase & Sale stipulated your rights to assign the contract. While most builders allow assignments, there is usually an assignment fee that must be paid to the Builder (we’ve seen everything from $750 to $7,000).

There may be additional requirements as well, the most common being that the Builder has to approve the assignment.

Marketing Restrictions

Most pre-construction Agreements of Purchase & Sale from Toronto Builders do not allow the marketing of an assignment…so while the Builder may give you the right to assign your contract, they restrict you from posting it to the MLS or advertising it online. This makes selling an assignment extremely difficult…if people don’t know it’s available for sale, how they can possibly buy it?

While it may be very tempting to flout the no-marketing rule, BE VERY CAREFUL. Buyers guilty of marketing an assignment against the rules can be considered to have breached the Agreement, and the Builder can cancel your contract and keep your deposit.

We don’t recommend advertising an assignment for sale if it’s against the rules in your contract.

So how the heck can I find a Buyer?

There are REALTORS who specialize in assignment sales and have a database of potential Buyers and investors looking for assignments. If you want to be connected with an agent who knows the ins and outs of assignment sales, get in touch…we know some of the best assignment agents in Toronto.

What are the tax implications of real estate assignment?

Always get tax advice from a certified accountant, not from the internet (lol).

But in general, any profit made from an assignment is taxable (and any loss can be written off). The new Buyer or Assignee will be responsible for paying land transfer taxes and any HST that might be due.

How much does it cost to assign a pre-construction condo?

In addition to the Builder assignment fees, you will likely have to pay a real estate commission (unless you find the Buyer yourself) and legal fees. Because assignments are more complicated, you can expect to pay higher legal fees than you would for a resale property.

How does the closing of an assignment work?

With assignment sales, there are essentially 2 closings: the closing between the Assignor and the Assignee, and the closing between the Assignee and the Builder. With the first closing (the assignment closing) the original purchaser receives their deposit + any profit (or their deposit less any loss) from the Assignee. On the second closing (between the Builder and the Assignee), the Assignee pays the remaining amount to the Builder (usually with the help of a mortgage), and pays land transfer taxes. Title of the property transfers from the Builder to the Assignee at this point.

I suppose it could be said that there is a third closing too, when the Buyer takes possession of the property but doesn’t yet own it…this is known as the interim occupancy period. The interim occupancy occurs when the unit is ready to be occupied, but not ready to be registered with the city. Interim occupancy periods in Toronto range from a few months to a few years. During the interim occupancy period, the Buyer occupies the unit and pays the Builder an amount roughly equal to what their mortgage payment + condo fees + taxes would be. The timing of the assignment will dictate who completes the interim occupancy.

Assignments vs. Resale: Which is Better?

We often get calls from people who are debating whether they should assign a condo they bought, or wait for the building to register and then sell it as a typical resale condo.

Pros of Assigning vs. Waiting

  • Get your deposit back and lock in your profit sooner
  • Avoid paying land transfer taxes
  • Avoid paying HST
  • Maximize your return if prices are declining and you expect them to continue to decline
  • Lifestyle – sometimes it just makes sense to move on

Cons of Assigning vs Waiting

  • The pool of Buyers for assignment sales is much smaller than the pool of Buyers for resale properties, which could result in the sale taking a long time, getting a lower price than you would if you waited, or both.
  • Marketing restrictions are annoying and reduce the chances of finding a Buyer
  • Price – What is market value? If the condo building hasn’t registered and there haven’t been any resales yet, it can be difficult to determine how much the property is now worth. Assignment sales tend to sell for less than resale.
  • Assignment sales can be complicated, so you want to make sure that you’re working with an agent who is experienced with assignment sales, and a good lawyer.

Still thinking of assignment your condo or house? Get in touch and we’ll connect you with someone who specializes in assignment sales and can take you through the process.

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