Can You Sell Condo In The Pre-Construction Phase? Yes, But…

Can You Sell Condo In The Pre-Construction Phase? Yes, But…

Condos have become a part of Toronto life. They’re as omnipresent as the CN Tower or signal problems on the TTC. Between 2012 and the end of 2016, 683 projects were completed, boasting 91,855 units.

For many people, buying a condo is the only way to break into the housing market. Most folks will become acquainted with the real estate process through purchasing their first condominium: the hunt, the offer, the contracts, and all the other minutiae that go into buying a home.

But there’s one aspect of the process that may be less familiar to many people: Assignment purchases.

Essentially, an assignment purchase is when someone pays for a pre-construction condo unit and then sells the deed to the property before it's registered.

A Complicated Matter

"They're a little more complicated," explains Jim Burtnick, a member of the Torontoism team for Sotheby’s International Realty. "What you're doing is selling someone your agreement of purchase and sale. The idea is to sell it for more than your purchase price."

The person selling the agreement is referred to as the assignor and the person buying is known as the assignee.

Burtnick says he’s done a few assignment sales in his career, but because of their complicated nature, they aren’t very common. He guesses the number is somewhere around 5 to 10 per cent of total condo sales in the city.

There's basically three people involved. So you've got the assignor, who's the person selling it. You've got the assignee, the person who's buying it. And you've got the developer agreeing to allow the assignment to take place.

He says that, from the developer's point of view, it doesn’t make sense to let the original purchaser sell their contract. If the assignee backs out of the deal then the builder is on the hook.

They don't want to have to go and chase somebody new to close on it. So it's keeping everybody in limbo. The assignor selling the unit is not going to get paid until the assignee actually closes on it, and it's a bit of a domino effect.

assignment1

Speculation

Still, the fact that it’s complicated won’t stop people from trying to make money off assignment sales. Burtnick says there is a tendency to speculate in the new-construction market. That’s when people buy pre-construction and sell it before the move-in date in the hopes of making a profit. Because the market in Toronto has been on an upward curve for a number of years, people are trying to take advantage of that.

For example, you don’t pay the full $500,000 price of a property upfront, you pay $100,000. If you can turn around and make an assignment sale you could potentially make another $100,000, doubling your investment.

The Benefits

There’s the tendency to think speculation would raise condo prices, but Burtnick doesn’t see it that way. "It's a reality of the market. I wouldn't say it's a problem because in many respects what it's doing is fast forwarding the project to get completed," he says.

He explains that builders need to sell 75 per cent of their inventory before they can get financing from a bank. Speculating speeds up the process by guaranteeing those buildings are sold.

If these people weren't in the market as speculators. It could take years to sell a project and consequently delay that supply getting to the market. And right now, our biggest problem in this city and the GTA in general is a lack of supply.

Beyond an expedited build, assignment purchases offer other benefits. For the buyer – or assignee – they don’t have to wait four or five years to move in, according to Burtnick.

Usually, when an assignment happens it's very close to the registration. The building's built.

assignment2

Why Do They Happen?

Speculation isn’t the only reason for assignment purchases though. Priorities change over time. Three or four years is a long time to wait between putting down an initial deposit and actually taking possession of the unit.

Burtnick points out that it’s not uncommon to be living a different life in a four-year time span. A single person who buys a condo, years down the road, could be married with a child.

And guess what? The condos not going to work for them anymore. Their lifestyle's changed. But the person who's going to get it is going to be moving in relatively quickly and it's a brand new unit.

Ultimately, assignment purchases can benefit everyone involved. For the seller, it’s an opportunity to make some money on investment or unload a property that no longer makes sense. For the buyer, they don’t have to wait to move in but get the bonus of buying a new property.

Burtnick compares it to buying a new car.

There's a peace of mind getting something brand new. It's like a car warranty. As opposed to getting a used car where you take your chances with it.

TT00ML

16 Responses

  1. Kenneth So

    Is there going to be a new law to ban assignment flipping? Thanks

    1. Richard Silver

      Most of the Builder contracts are set out so that the units can only be assigned with approval of the Builder. I know that the Government will be and is looking at assignments and it is certainly on their radar. Let’s see what they bring to the table and if it gets approved and becomes a law. All of their new rules are yet to go through Provincial processes to become laws so there may be changes along the way.

  2. jimmy yuan

    is the pre-construction units also includes in the active-listing or new-listing counts in the released figures from treb? And when the assignment sellers puts in on the market, will it be counted again and sold again to double up the published figures?

  3. Richard Silver

    Hi Jimmy,

    Most assignments and pre-construction are not tracked at all in the MLS numbers. It’s a major part of the market that is not taken into the TREB statistics and it consists of an additional 30-40% of sales not monitored by the marketplace. TREB only tracks resales and builders do not allow assignments on MLS. So, not only are the stats not doubled, they do not affect the total number of sales.

    1. Rizwan Malik

      Hello Sunny,

      HST is typically paid by the developer and if the suite will be owner occupied then the builder will pay the rebate portion. However, if you are buying the suite as an investment then you will need to pay for the HST rebate upfront and apply for it through CRA. All agreements are different so it is very important to work with a realtor who is well seasoned in this and get top notch lawyer review.

  4. Nate

    Thank you for this insight,

    Is there a website to buy and sell assignments? How do people know about what assignments are out there?

    Also, what are the implications regarding taxes — is the profit from selling the assignment considered capital gain?

    Thanks in advance.

    1. Rizwan Malik

      Hi Nate,

      Assignments are typically word-of-mouth advertising. We are very well connected in the industry to fellow realtor. If you would like to email me with an idea of what you’re looking for, I can give you a list of what is available. rmalik@sothebysrealty.ca

      Also, the profit is considered capital gains if you intend to sell it immediately after completion or if you decide to keep it as an investment property. If you choose to occupy the suite for yourself then you may be capital gains exempt (if the unit is your primary residence).

  5. Suban K

    Hi,
    When does the assignor get paid during an assignment? Do they get their 20% back during the initial transfer of sale or is that negotiable and the rest at closing? Also, does the assignee have to pay 20% during the assignment sale of the total price during the assignment sale?

    Thank you,
    Suban

    1. Rizwan Malik

      Hello Suban,

      There are two ways to handle deposit paid to the developer by the Assignor. The Assignor may require it be paid in full upfront along with the difference in price or the Assignor might agree to be paid upon unit transfer date. The most common practice is being paid upfront as soon as the builder agrees to the assignment.

  6. Suban

    Hi,
    With CRA now looking very closely at condo assignments and tax implications (capital gains vs. reported income), what type of transaction refers to report income? If I was selling my condo, to help pay for my personal debt or for a significant change in my life, like the birth of my child, can I assume capital gains tax would apply in the above scenario?

    Thanks

  7. M hussain

    I have bought a house with builder – starlane Milton, closing date is November 8, 2018, Builder allowed to transfer the contract, is it possible I can sell or transfer before closing – thanks

    1. Rizwan Malik

      Hi M,

      since each contract is different, I recommend you ask your lawyer to review the contract before you make any decisions.

  8. Eri

    I am new to assignments and am interested in purchasing a condo being built near my home. The occupancy is near and closing is set for August of this yr. Is it possible (or legal) to ask for a showing of property even though both occupancy and closing dates have not passed?

    1. Jim

      Hi Eri,
      Thank you for your inquiry.

      You can certainly ask for a showing however, it simply might not yet be possible if the current Buyer (or his/her agent) does not have access to the suite given occupancy has not taken place.

      Alternatively, you could ask the seller (or his/her agent) to contact you when they do get access for showings. The only risk you run here is if someone else buys the suite unseen via an assignment.

      I trust that answers your questions and thanks again for the inquiry.

      I can be reached via my email at jburtnick@sothebysrealty.ca

      Regards,
      Jim

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