6 Frequently Asked Questions About Assignment Sales in Ontario Answered

We do not know exactly when assignment sales became a part of real estate transactions in Canada. Assignment sales as a concept likely stems from the general principle of contract law. Contracts in Canada allow for the assignment/transfer of rights and obligations as long as it doesn't violate/harm the original agreement or the other party (the developer in the case of real estate).

What we do know, however, is that with the rise of pre-construction condo sales in Canada, assignment sales naturally became more common due to their synergy with this type of property. They automatically became really attractive to investors who can now buy pre-construction units at a lower price and then assign the contract before completion at a potential premium.

Which brings us to the question "Does this mean that assignment sale buyers are paying more than they should?" Not necessarily. Assignment buyers pay more than the original price sure, but it can be a good deal if the market value has risen or they want the unit sooner.

The subject of assignment sales is filled with FAQs like this which stop many home buyers from ever considering them as an option. That is why today we have taken the task to answer these questions and make you just a bit more confident.

1What is an assignment sale and how does it work?

In simplest of terms, an assignment sale is basically the selling of a contract to purchase a property, most commonly seen with pre-construction condos. Here's how it works:

Imagine someone (the original buyer) signs a contract with a builder to buy a condo that's still under construction. Before the construction is complete, the buyer might decide they no longer want the condo, perhaps due to a change in circumstances or to make a profit if the market value has increased.

In an assignment sale, the original buyer finds someone new (the assignee) to take over their place in the contract. The assignee agrees to pay the original buyer the initial deposit made to the builder, plus any additional profit. Once agreed, the original buyer "assigns" their rights and obligations to the assignee, who then takes on all responsibilities and payments in the original contract, including completing the purchase when construction is finished.

2What do sellers gain out of an assignment sale and what do they lose?

If the market value of the property has increased since they bought it, sellers can potentially make a profit by selling their contract at a higher price to the assignee. More importantly, assignment sales can be a quicker way to sell a property compared to waiting for resale upon competition.

By selling the assignment, sellers can avoid ongoing holding costs associated with property ownership, such as property taxes, insurance, and maintenance fees, especially relevant for pre-construction properties with a long wait time. All of this makes assignment sales an extremely flexible option to get out of a purchase they are not interested in anymore.

If the market value continues to rise after the assignment sale, the seller misses out on the potential for even greater profit when the property is finally built and sold traditionally. Moreover, there may be assignment fees associated with the process (charged by the developer or realtor involved), which can eat into the seller's profit.

There is also the case that there's no guarantee the seller will find a buyer willing to pay a premium for the assignment. The market could have softened, or the assignee might not be willing to pay a high enough price. Don't forget this is Ontario we are talking about, assignment sales can involve more complex legalities compared to a standard sale. If not handled properly, there could be legal disputes with the assignee or the developer.

3What do buyers gain out of an assignment sale and what do they lose?

Buyers can gain several advantages through assignment sales. One significant benefit is the potential price advantage: they might acquire a property at a price lower than the current market value, though still higher than the original purchase price. Additionally, assignment sales offer early access to the property, allowing buyers to secure an in-demand unit before construction is complete, effectively getting ahead of the queue. Furthermore, the down payment required for the assignment is sometimes lower than what a bank would require for a mortgage on a completed property, making it financially appealing for buyers.

Market uncertainty poses a risk; if the property's market value has decreased since the original purchase agreement, buyers might end up overpaying. Additionally, construction delays could prolong the wait for ownership, causing inconvenience and potential financial strain. Hidden costs, such as legal fees, taxes, and closing cost adjustments, can also burden buyers. Moreover, the opportunity to inspect the property might be limited due to ongoing construction, leading to unforeseen issues. Lastly, final closing costs might be higher than initially anticipated, causing budget strains for buyers.

4What is the assignment sale process?

The assignment sale involves two key steps:

Assignor to Assignee: Here, the original buyer (assignor) transfers their rights in the purchase agreement to the new buyer (assignee). This includes the assignee reimbursing the assignor's deposit and potentially paying a profit if the market has risen. Legal counsel is crucial to ensure a smooth transfer and address any clauses in the original agreement.

Assignee to Builder: Once settled with the assignor, the assignee finalises the purchase with the builder. This involves paying the remaining balance and receiving the property title (or rights in a pre-construction scenario). Again, a lawyer's help is vital to ensure proper paperwork and a seamless handover.

5What is the difference between pre-construction vs. Resale assignments?

Pre-construction: Here, you're buying the rights to a property yet to be built. The potential profit can be higher, but you'll wait for completion and inherit the original buyer's schedule. Delays and market fluctuations are factors to consider.

Resale: You're buying the rights to an already existing property. Occupancy might be sooner, but the profit margin could be smaller. Review the original purchase agreement for any restrictions on resale assignments.

6Are there any tax implications?

Yes, there are and it can impact both assignor and assignee. The assignor's profit might be taxed as business income, not a capital gain, depending on their intent when buying. The assignee inherits the original purchase price for tax purposes, impacting potential capital gains tax down the line. Consulting a tax advisor is recommended to know the specifics of your situation.

The bottom line

Assignment sales can be a valuable tool for both buyers and sellers in the Canadian real estate market, particularly for pre-construction condos. By demystifying the process and potential outcomes, we hope you feel more confident in considering assignment sales as part of your real estate strategy.

Remember, consulting with a lawyer and a realtor experienced in assignment sales is crucial to ensure a smooth and successful transaction. They can guide you through the legalities, identify potential risks and opportunities, and ultimately help you achieve your real estate goals.