Why assignment sales are in the news – and the risks associated with them
October 27, 2022
The topic of assignment sales has been in the news recently. It seems a higher number of buyers than usual are looking to sell their purchase agreements on pre-construction condos.
The Real Estate Commission of Ontario defines an assignment sale this way:
“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.”
It’s important to know the legal terms when it comes to assignment sales. Technically, when you make a deposit with a developer, you’re buying the ‘right to purchase’ a specific unit before the building is built and not an actual unit, which is an important distinction.
The paper you receive indicates that the unit will be registered in your name and you’ll get a deed. That doesn’t happen until the building is completed, goes through the approval process, and is registered. Until then, it’s a building owned by the developer.
An assignment sale happens when somebody who has made a deposit on a pre-construction condo (or house) no longer wants to complete the purchase.
Developers don’t like assignment sales because ultimately, they are trying to control pricing in their building. If they still have units available, they can’t allow the seller to undercut them. They need assignment sales to be at a higher price per square foot or for the amount they purchased.
There are a number of risks associated with assignment sales.
First, a seller needs permission from the developer to sell. If you read the fine print, you learn that the developer has put in stipulations about assignment sales including rules about advertising and marketing. (Mostly that you can’t advertise or market the property in any way, which makes it challenging to sell.)
Oftentimes, there is an assignment fee that needs to be paid to the developer.
As the original purchaser, if the person you sell it to can’t, or doesn’t, follow through with the sale, you could be on the hook to complete the sale.
A risk to the buyer is that the project won’t be completed or the cost of the unit could increase. If the developer comes back asking for more money, the original purchaser could be responsible for covering that increase.
This begs the question: why would someone want to sell the rights to their condo before it’s completed?
In an upward market, you can make a sweet profit on something you never actually owned. If you left a deposit with a developer in 2019, the value of the unit you agreed to purchase went up and you make a tidy profit.
This practice became so common that the CRA started cracking down on assignment sales because a lot of money was changing hands and nobody was paying taxes on it.
In this year’s budget, the government began implementing a tax on assignment sales. On sales completed after May 7, 2022, the original purchaser needs to pay HST on the profit made on the sale because it’s now a product they’re selling and not an actual condo. (Remember when I told you it was important to pay attention to the legal terms?)
Another reason that someone might sell is that their life may have changed. Perhaps they left a deposit on a one-bedroom unit and they’re now coupled – or have a family. They may have taken a job out of the city, or, in an unfortunate case, they can no longer qualify for financing based on their current income.
I suppose one reason an assignment sale might be attractive is that you get something brand new with less of a wait. Or, you may be interested in a particular building with a very specific floor plan. I’ve said it before, I much prefer dealing with bricks and mortar than pieces of paper.
Assignment sales are complicated and risky, especially in a market where more and more developers are walking away from developments or they aren’t being built.
It’s extremely important in these instances to have a real estate lawyer well-versed in assignment sales so that whether you’re the assignor or the assignee, you’re protected and all possibilities are covered.
If you have any questions about assignments sales or Toronto’s real estate market, please get in touch.