toronto assignment contractsIf you’re looking to buy a condo, you may have come across some MLS listings that are being sold as “assignments“. Today we’re going to look at exactly what an assignment is and what it means for the Buyer.

Some background on pre-construction condos…

To be able to really understand what an assignment is, you need to know a few things:

  • When a Buyer agrees to buy a condo from a builder during the pre-construction phase, they sign a pre-construction purchase contract (with a price, terms and conditions, a deposit, etc.)
  • When the new condo is built and ready to be moved into, there is a period of ‘interim occupancy’, where the Buyer can take possession (in other words, move into the unit). During the period of interim occupancy, the Buyer does not yet own the condo; they simply pay the builder an amount roughly equal to what their mortgage payment + condo fees + taxes will equal. No transfer of land has yet occurred, and no mortgage has yet been given.
  • Once a building has passed all the city inspections and gone through all the processes to become a legal entity, condominiums are officially registered. During this registration period, condo ownership is transferred to the Buyers, mortgages come into effect and Buyers officially become owners (a.k.a. the closing). The period between occupancy and registration (i.e. the interim occupancy period) can be anywhere from 3 months to 2 years–though registration typically happens 4-8 months after people begin to move in for the interim occupancy period.
  • Sometimes, Buyers of pre-construction condos change their minds and want to sell their condo either before the occupancy period or before the official close. Their life circumstances may have changed, or they may have been speculative investors who never intended on actually taking possession of the unit. Because they don’t yet own the condo, they can’t actually sell it. What they can do however, is sell their contract (their agreement with the builder to buy a unit) to another Buyer. This is what we call an assignment.

What is a condo assignment?

With an assignment, the Seller is actually selling their interest in a property (in other words, their contract with the builder). They aren’t selling the actual condo (as they don’t own it yet); they are selling their promise to purchase a property.

When you purchase an assignment, you are essentially stepping into the shoes of the original purchaser. You can’t renegotiate the price or terms of the contract, you are simply taking over the contract as it already exists.

It’s important to note that some builders won’t allow their original purchasers to assign contracts, or will only do so for a fee (we’ve seen assignment fees from $750 to $7,000). Builder approval to assign a contract is almost always necessary.

Advantages and Risks of Assignments for Buyers

  • When you buy an assignment, you take on all the terms and conditions that the original purchaser agreed to – so if he or she didn’t get a lawyer to approve the agreement for example, those risks are passed onto you. While you can have your lawyer review the terms they agreed to, you can’t renegotiate them.
  • You also take on the usual risks of buying a pre-construction condo: time delays, changes to the unit or building, extended interim occupancy periods, etc.
  • Depending on what stage of construction the condo is in when the contract is assigned to you, you may or may not be able to be involved in selecting finishes and upgrades.
  • Because it’s a new construction condo, HST may apply. If you don’t actually move into the unit, you’ll be responsible for paying tens of thousands of HST on closing.
  • When a condo is assigned to you, you generally have to mirror the deposit that the original purchaser has paid to date. So rather than providing the usual 5% deposit for a resale condo, you may be required to provide 15% of even 20% as a deposit. If you are a first-time buyer with a lower down payment, you may not be able to afford the deposits required for an assignment.
  • With an assignment, you will be eligible for the Tarion warranty program, which provides years of warranties against defects and problems with your condo, and because all the appliances will be new too, they’ll also be covered by warranties.
  • When the unit is officially registered and you close on the purchase, you’ll be responsible for all sorts of closing costs that don’t apply to resale units. These ‘builder adjustments’ apply to all new construction projects and include development and education costs, HST on appliances, utility connections fees and Tarion fees. These builder closing costs can easily amount to 1-3% of the original purchase price (and there’s talk of the development fees doubling in Toronto in the near future). If you’re looking at taking over someone else’s contract via an assignment, look to see if the original purchaser capped the amount of these costs when they originally negotiated the unit. Otherwise, make sure you have lots of money put aside for closing costs.
  • Legal fees to purchase an assignment condo are generally higher than typical resale condo purchases. For a condo under $500K, plan on legal fees around $2,500 (vs $1,800 for a resale).
  • When you close on the actual purchase with the builder, you’ll need to pay land transfer tax. Because no land ever exchanged hands, the original purchaser will get to avoid paying land transfer tax.
  • Going through the assignment process can be a great way to purchase a condo in a building that has no remaining inventory, and often the actual purchase price (before closing costs) is lower than it will be once the building has registered and the condos are offered for sale in the resale market.

The assignment process is a tricky one, with risks, legal requirements and paperwork that doesn’t look anything like the usual agreement of purchase and sale for a condo.   If you’re considering an assignment, make sure you work with a REALTOR who understands the intricacies of assignments and can guide you through the process. As always, we’d be happy to help!

 

 

 

  1. Can you explain how the above might affect an “assigned sale” property being rented out?

    In other words- if I purchased a unit – and it’s currently under assigned sale and I wish to rent it out in an unfinished building at the moment is there anything the prospective tenant should know ahead of time?

    Thanks

    • Melanie Piche says:

      The original agreement of purchase and sale with the builder will define what’s allowed during the occupancy period – some builders restrict rentals completely, some want to approve them, some allow rentals if the buyer uses the builder’s agent and some let people do whatever they want.

    • Melanie Piche says:

      Condo assignments aren’t easy or in huge demand, but if you bought in a sold-out building that people are still interested in, it’s totally possible. That assumes you have the right to assign the unit in your contract of course…

  2. If the Agreement of purchase and sale stated that prior to closing, the purchaser covenants and agrees not to sell, lease, transfer or assign this Agreement or unit, could I still be able to assign the unit if I pay a fee with the vendor written consent?

    Thanks.

    • Melanie Piche says:

      It sounds like you’ve agreed not to do it in your contract…you’d have to talk to the builder to see if they are are open changing the terms of your contract.

  3. If i am buying an Assignment with a tenant in the unit in May and i plan to use it as my primary residence after final closing in September 2016. Does the few months of rent I receive from the tenant affect my qualification for the HST rebate?

    Thanks.

    • Melanie Piche says:

      You’ll want to check that with your lawyer…HST rebate laws are complicated and beyond the scope of what we can give advice about. Good luck!

  4. if i buy an assignment condo with a purchase price higher that what original buyer paid, how is the land transfer tax calculated? Builder only charges tax based on original purchase price. How should I declare the purchase price, so when i sell the condo few years down the road and if I have to pay capital gain, I won’t have to pay capital gain based on the price I actually paid?

    • Melanie Piche says:

      Excellent questions! You’ll want to talk to your lawyer/accountant about that…that’s outside of the scope of the advice we can give.

    • Brendan Powell says:

      You might find this Ministry of Finance bulletin useful:

      http://www.fin.gov.on.ca/en/guides/ltt/guidenote1.html

      Generally though, when it comes to land transfer tax you are paying tax on the value of what you bought, i.e. What YOU paid.
      For capital gain, I expect you only pay tax on whatever gain YOU had. Gain that happened on someone else’s watch is their problem!

      As Melanie says though, you need an accountant and lawyer to advise on your particular situation.

  5. sorry in my last comment, I meant ” I won’t have to pay capital gain based on the price original buyer paid”

  6. if I buy an assignment property, do I pay the despoits to original buyer right away or do I wait until closing also do I have to get mortage pre approval right away or can I wait until later.

  7. How likely is it that a seller is able to get a higher price on an assignment than they paid? If they do, then is the buyer required to pay the entire amount at once?

    • Melanie Piche says:

      Many people successfully assign properties at a premium. On the closing of the assignment, the buyer pays you whatever deposit you paid the builder + any profit you’ve agreed on. They pay the rest of the money (usually via mortgage) to the builder when the building registers.

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