After being in the pre-construction business for over 7 years, I get asked this question a lot: "How does assignment work?" Or "What if I want to sell before I move in?"
Assignment has been in the game for a while, it does provide flexibility for purchasers for unforeseeable changes in their lives.
In short, assignment is an amendment in the Purchase Agreement that allows purchaser to "assign" the contract to another buyer. Let's say if you are not able to close the unit, or you have changed your plan about moving in, then you can exercise such clause to "sell" the unit to another buyer and have the new buyer to close the unit instead.
However in recent years, Assignment rights have been used as a tool for people to "flip" their pre-construction purchase. It worked for a while, given the burning hot Canadian real estate market. I myself helped quite a few clients with their assignments, and they were happy on the return.
So how does assignment work exactly?
Let me use an example to demonstrate.
Let's say Jack purchased a pre-construction condo unit for $800,000 with an assignment clause in place.
Jack paid 20% deposit on the unit, totalling $160,000
The unit is supposed to be finished in 4 years.
By year 3, Jack decides to sell his unit, or contract in this case as the unit is not delivered yet. So he hired an agent to find a buyer
Now that market price has went up and the unit is now worth $1,000,000
And I helped Jack find a ready buyer Jane who's willing to take over the unit at $1,000,000
So now in order to take over the unit, Jane will need to pay back Jack the deposit he has paid, plus the profit.
The math would work as the following for Jane (the buyer):
Selling Price: $1,000,000
Original Purchase Price: $800,000
Profit: $200,000
+
Deposit paid by Jack: $160,000
=
Total payable from Jane to Jack: $360,000
From Jack's perspective, there are transaction costs to be considered:
Assignment fee: it's a fee charged by the developer, range from $0 to $100,000. It's a arbitrary number given by the developer and will be stated in the contract. Normally if you are purchasing pre-construction in the VIP round, developer usually waive the assignment fee for you
Legal fee: legal administrative fee to developer's lawyer. They could range from $500 - $2,000
Broker fee: Jack has hired an agent to at commission rate of 5%, totalling $50,000 (5% x $1,000,000)
The math would work as the following for Jack (the seller):
Total payable from Jane to Jack: $360,000
-
Assignment fee: $0
-
Legal fee: $1,000
-
Broker fee: $50,000
=
$309,000
But that's not all. Canada recently introduced GST/HST on the profit portion of an assignment sale.
So the final proceeds that's going to Jack will be
$309,000
-
HST (13%) on Profit: $200,000 x 13% = $26,000
=
$283,000
Hopefully, this helps you understand the assignment sale transactions better.
In my opinion, we should always hold a medium to long term view when it comes to purchasing real estate.
Assignments only work well in an environment where there's exponential increase in price. But given the current interest rate rising environment, as well as the government's increased taxation, assignments aren't as profitable. Most clients should see assignment as an option should there be any changes to their planning.
At the end of day, long term investing in real estate prevails.
