If you’re looking to buy a condo, you may have come across some MLS listings that are being sold as "assignments". Here's what a condo assignment is and what it means for the Buyer.
Some background on pre-construction condos…
To be able to 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, 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 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 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 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 soon). 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 usually 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.