Condo Assignment

///Condo Assignment

Condo Assignment

Condo Assignment-What to look out for?

Condo Assignment Sales and PurchaseCondo Assignment is becoming very common, especially in the Toronto condo market.

And now this trend is coming to Downtown Mississauga. At my request, Shaffiq Dar, a prominent real estate lawyer in Mississauga has provided some insight into buying and selling condo assignment Sales and Purchases. Below is his reply:

 There are several reasons for this trend in condo assignment sales?

  • A simple supply and demand issue – there is more demand for condos then there is stock available;
  • Many more people are interested in real estate investments and are willing to purchase pre-construction units which they then try to flip when demand is greater;
  • Simple greed – purchasers camp outside new developments, snap up units at reduced prices and then enter into assignments once builder’s inventory is sold out.

Condo Assignment sales are messy and unless you are very careful, these deals can go sour fast. As assignments are now seen as “Third Way” of buying condos in Toronto (the traditional two ways being pre-sale or resale), it is important for you, as real estate agents, to understand:

  1. what is a condo assignment sale;
  2. what are the advantages for both the purchaser and the seller in condo assignment sale;
  3. what clauses you should ensure are included in the Assignment of Agreement of Purchase and Sale; and finally
  4. what the “red flags” are that should put you, as the purchaser’s agent, on guard.

What is a Condo Assignment Sale?

The most important thing to bear in mind when dealing with a condo assignment sale is that this is not the sale of real estate but merely a sale of the interest in the Agreement of Purchase and Sale. Your client is not buying the property. He is buying the Agreement of Purchase and Sale.

So the first thing that you must start off with is a review of that Agreement of Purchase and Sale. I will refer to that as the Underlying Agreement. And to keep it simple, we will refer to the parties involved in such a transaction as the builder, the seller and the purchaser.

So Sam enters into an Agreement of Purchase and Sale with condo builder. That is our Underlying Agreement. Sam then enters into Assignment of that Underlying Agreement with Sara. Sam is our seller and Sara is the purchaser.

Advantages for Seller

Some of the advantages from the seller’s perspective are:

  • Get money back! The Seller will have paid a deposit of 20-25% to the CondoBuilder. Let’s face it, 20-25% of the purchase price for an average condo in Toronto is a lot of money. Either the seller’s plans have now changed and he wants that money for something else or the seller is an investor and wants to get his deposit back so he can move on and invest that money in another project. Selling by assignment is a way to get that deposit money back.
  • Avoid occupancy fees. If you have no intention of living in the unit, why pay occupancy fees? Remember that in some cases, there may be a gap for up to 2 years between occupancy and final closing. The seller does not want to pay occupancy fees for 2 years if he is neither living there nor has any intention of living there.
  • Avoid closing costs. Closing costs on a new condo can be significantly more than the closing costs on a typical resale. This is because the Agreement of Purchase and Sale will usually have a list of closing costs which are to be adjusted on final closing. Such closing costs may include things such as the Tarion warranty charges, law society levy, meter connection charges etc. Selling by way of assignment means the seller passes all these closing costs on to the buyer.
  • Increased value. If the seller had bought a pre-construction condo in 2007 or before, then your investment has probably appreciated significantly. For some, selling their contract is a great way to take the profit and move on.

Advantages for Purchaser

Although you, as agents, and I, as the lawyer, may not like condo assignment sales, we need to consider it from the point of view of our clients. Let’s take a look at the key advantages for buyers of assignment listings.

  • Lower purchase price. Buying an assignment is sort of like having a time machine and being able to go back in time to purchase a condo today, at yesterday’s prices. Sellers know they have to price their units for less than what the developer would sell a similar unit at today. Savings can be in the tens of thousands compared to buying through the developer, and in some cases the price paid is even lower than what is available on the resale market. Remember that the seller is keen to re-coup his investment (i.e.. the deposit) and the profit and move on.
  • Stronger bargaining position. Instead of dealing directly with the CondoBuilder, the purchaser is negotiating and dealing with an individual. The purchaser may be able to negotiate a better deal than if he were dealing with the condo builder.
  • Lower taxes. If the Underlying Agreement was originally signed prior to the new Toronto Land Transfer tax kicked in (January 1, 2008), the purchaser can save herself a few thousand dollars in closing costs by not having to pay the Toronto Land Transfer Tax because the Underlying Agreement would be grandfathered. Similarly, the purchaser could save on HST if the Underlying Agreement was entered in to before HST kicked in.
  • New condo without the wait. Speaking to many purchasers, especially first time home buyers, the common theme was that they would not want to wait for a couple of years to move in to their new home. Many others are not comfortable with the pre-construction sales because they cannot “touch and feel” the product before they buy it. When your client buys an assignment, he does not have the usual 3-4 year wait time and often occupancy is only months away. The greater advantage is that the construction has commenced or is nearing completion and the purchaser is able to touch and feel the product, not just buy from a plan.
  • Tarion Warranty. All new development is covered under the Ontario New Home Warranty Program or Tarion. The purchaser will have that advantage of the Tarion warranty if there are any defects in the property and for many that peace of mind is the deciding factor.
  • Inherit VIP incentives. Many sellers of assignments are investors who purchased during the initial ‘VIP’ stage of the sales process, when prices were lowest and often many upgrades were thrown in by the developer for free. We are all familiar with the lines ups outside new developments and at times people even camp out there for days to take advantage of these incentives. Those free upgrades and lower prices can be passed on to the purchaser.
  • Negotiate from a position of strength. Many sellers are selling because they cannot wait until occupancy or final closing -they need to get their money out now. Negotiating with someone in this position can be advantageous. The purchaser has the upper hand, so the speak – a rare phenomenon in the real estate market today.

Title Insurance. One thing to bear in mind is that title insurance is only available on ‘real’ property. Thus an assignment purchaser will not be able to obtain title insurance until the final closing.

What clauses should be included in the Condo Assignment Agreement?

As with anything else, your foundation has to be strong. In an assignment sale, your foundation is the Underlying Agreement. Rule number one for you must be that the foundation i.e the Underlying Agreement should be strong. Never ever let your client enter into an assignment agreement without a review of the Underlying Agreement having been completed. Make sure that the Assignment Agreement is conditional on the purchaser’s lawyer reviewing the Underlying Agreement.

Almost every Pre-construction Agreement of Purchase and Sale that I have reviewed to date has some restriction on the sale of the unit before final closing. Some restrictions are much more stringent than others. Most will only agree to an assignment after at least 75% of the units in the project have been sold. Many will demand an assignment fee which at times could be as high as $5,000.00.

It is imperative that the purchaser review the Underlying Agreement to confirm that an assignment is permitted and what fees, if any, are payable to the CondoBuilder on an assignment.

If an assignment fee is payable, the purchaser should negotiate with the seller such that either the seller will pay the assignment fee or at least pay half the amount.

The seller may have paid up to $50,000.00 as a deposit to the CondoBuilder. That may equal to $2,000.00 annually in interest that would be credited to the seller on final closing. The purchaser wants that interest to be credited to her on final closing and the seller wants the interest. A compromise may be for the assignment agreement to provide for the interest credit on final closing to be split between seller and purchaser.

As we noted above, the closing costs on the purchase of a new development are significantly higher because of the Tarion fees, meter connection charges, development levies, etc. The purchaser wants to ensure that these closing costs are known so that he is not caught by surprise at the time of final closing. Many times, the seller may have got the closing costs capped. You want to make sure that these caps are passed on to the purchaser. Sometimes, you may be able to get the seller to agree to pick up part of the closing costs. Of course, this will depend a lot on how eager or desperate the seller is to sell.

If the seller is keen to re-coup his investment, then he may try to insert a clause in the assignment agreement that the deposit paid by the purchaser is to be released to the seller immediately. Naturally, the purchaser does not want that because if the deal falls through, it becomes difficult to recover that deposit form the seller. You want the deposit to be held in trust by the seller’s lawyer or the real estate agent.

Confirm in the assignment agreement how the seller will meet all of the requirements for a valid assignment, and set out what will happen if there is any breach of the assignment agreement or the Underlying

The purchaser must review the CondoBuilder’s Disclosure Statement and thoroughly review all documents related to the sale.

There should be an acknowledgement that the purchaser is responsible for any remaining deposits to be paid to the CondoBuilder.

There should also be an acknowledgement that the purchaser is responsible for the occupancy fees.

There must be an acknowledgement that the seller understands that if the purchaser is unable to close, the seller will be responsible for closing the condominium;

Has the unit been rented during interim occupancy? Are there any tax implications for this? Does the purchaser need to get an assignment of the tenancy agreement or an acknowledgement of the tenancy terms by the tenant?

Red Flags in a Condo Assignment

Some of the issues that should put you, as the Purchaser’s agent, on guard when dealing with assignment sales are:

  1. Some of the issues that should put you, as the Purchaser’s agent, on guard when dealing with assignment sales are:
  2. Seller does not want to provide copy of the Underlying Agreement until Assignment Agreement is firm.
  3. Seller does not agree to Assignment Agreement being conditional on review of Underlying Agreement and Condominium disclosure documents being reviewed by purchaser’s solicitor.
  4. Seller is overly greedy – purchase price in Assignment Agreement is close to market price of the property or the price that CondoBuilder is offering if there are any units in the project still unsold.
  5. Purchase price in Assignment Agreement is lower than or very close to the purchase price in the Underlying Agreement i.e Seller is not making a profit? What is the reason for the sale?
  6. Expected closing date is long after closing of assignment sale.
  7. Seller cannot confirm that consent of the CondoBuilder will be provided for the assignment.
  8. Seller is very keen to get out of the deal, at whatever cost and in whichever way.
  9. Deposit required under Assignment Agreement is an unreasonable amount or exceeds the deposits paid by the Seller to the CondoBuilder.
  10. Deposit is being released to the Seller prior to closing of the Assignment Agreement.
  11. Seller does not disclose amount of occupancy charges payable for the unit.
  12. Revenue Canada will consider an assignment sale as fully taxable and won’t allow 50% capital gain tax exemption rule

Condo Assignment Checklist

Go through the following checklist of issues to be considered when preparing an assignment agreement of purchase and sale:

  1. Obtain a copy of the CondoBuilder’s Underlying Agreement;
  2. What form of assignment agreement to be used;
  3. What is the original purchase price;
  4. What is the new purchase price;
  5. The amount of deposits already paid by the seller; are these deposits included in new purchase price or in addition to the purchase price as a reimbursement to the seller (the CondoBuilder will provide a credit for these deposits to the seller on the final statement of adjustments);
  6. What is the deposit amount on the assignment transaction and who will hold the deposit – the agent/broker, the seller’s lawyer etc. – or is it to be released to the seller;
  7. What is the status of construction and closing dates – interim occupancy and final closing dates;
  8. What is the anticipated possession date;
  9. Has seller received notice from the CondoBuilder of an extension of the interim or final closing date?
  10. What is the amount of the occupancy payment;
  11. Is there a fee to be paid to the CondoBuilder’s for the consent to assignment and what is the status of obtaining such consent;
  12. Who is to pay for the consent and will the seller agree to share the cost;
  13. Is the CondoBuilder’s form of assignment agreement available for review by the purchaser’s solicitor?
  14. What is the total amount of the closing costs payable on final closing; Have these costs been capped? Will seller agree to share these costs?
  15. Who is to receive credit for interest on the seller’s deposits already paid to the CondoBuilder; and
  16. Are there any incentives/credits/upgrades to given to on final closing and will these pass on to the purchaser?

Bottom line, assignments are not for everyone, but for the right buyer and seller, working with a good real estate agent and lawyer, they can be a fantastic way to transact in real estate.

Written by Shaffiq Dar,
Barrister & Solicitor
RealCorp Law Professional Corporation

Thinking of Assigning Your Newly Built Condo in Mississauga?

Assignment sales need careful handling. A good assignment deal should be a win win for all the parties (builder, buyer, seller and salespersons). If you are looking to buy a builder’s newly built condo in Mississauga, I might have a few brand new condos available for assignment sale at Square One.

CALL ME!

Looking to buy or sell a new condo by an Assignment Sale?

Amit has bought and sold many condos assignments successfully. Buyers are not charged any fees!
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By | 2017-01-23T12:10:54+00:00 January 27th, 2014|Categories: Condos, Square One Condos|Tags: , , |Comments Off on Condo Assignment

About the Author:

Amit Kalia
Amit is a full time local REALTOR® since 2003. Currently he is with RE/MAX Real Estate Brokerage Inc. in Mississauga. RE/MAX is Canada's #1 real estate company. He is supported by a very strong Sales and Marketing team. Together with his team, Amit has been serving property sellers, first time buyers, real estate investors, landlords, renters, new immigrants to Canada and non-residents. Amit and his team specialize in Square One condos and also work in many other Mississauga neighbourhoods. Team Amit Kalia offers a 30 Days Sold Guarantee to Sellers. Amit's team also provides exclusive A La Carte property management services for their investor clients and landlords.