Assignments (minimizing the risks?)

[district]

What are the steps involved to minimize the risks associated with purchasing a condo by way of assignment? Of course, I will get a lawyer to help me once (and if) I find something I am interested in purchasing. However, I like to do my homework beforehand.
If anyone has any links on this topic, please post them. I would love to read the information you have.

Finding an assignment would be, for me, the most convenient way to proceed (I absolutely have enough money to pay cash for the down payment required and I need to sell my condo in another city before I can purchase something in Toronto). The reason why an assignment would be convenient for me is that I would have an idea when the condo I am purchasing would be ready. I would have time to sell my condo and move in to my new home (I would not have to borrow money to purchase my new condo). I would prefer purchasing a preconstruction but I need a place in Toronto and I am not willing to wait about 3 years for the place to be built. Assignments involve more risks but I have to admit that I need to educate myself more on this topic to see if I really want to go that route.



Here, they give some very brief information on the potential risks associated with assignments:

http://www.fic.gov.bc.ca/pdf/alerts/ConsumerAlert200805.pdf

They mention; “consider all your options, such as whether the deposit and “lift” will be paid to the assignor upon signing the agreement or held in trust until some later date. Generally, it is preferable from the assignee’s perspective if money is released to the assignor only after the unit is built and title is being transferred”.

Do the majority of assignor agree with this (reasonable) request?

 

[interested]

I have no first hand experience but what I have heard is that most assignors expect to get their downpayment back when the assignment is signed with the difference to be paid on closing.

The assignor obviously will want use or at least interest on his money from the date of assignment so while it may be reasonable, in a market where the assignor is pressed, he may accept but if he has demand for the unit, he won't be in a position to be forced to accept that he have his deposit money tied up any longer than necessary.

Obviously to assure yourself you would have to have an iron clad agreement viewed by the lawyer and proof that the money you paid to the assignor if you have to is with the developer and applied toward the property at closing. You could write in a clause I would think that would state that should for whatever reason the purchaser's deposit that you have paid back to the purchaser not be applied in full towards the final purchase that the purchaser lowers the purchase price by a corresponding amount.

In fact, I would suggest to you that most assignors will want out of the deal and their money immediately. Obviously I would not agree to pay the difference between ask and the original price up front, but I don't know that it is entirely reasonable to expect the assignor to keep his capital tied up for what may be another year or 2, especially bringing in no interest.

I will be curious to hear other peoples views. Maybe there are some lawyers on the forum or agents who have experience who can enlighten us further.

 

[district]

Thanks for your reply interested! We’ll see if anyone else can comment on this topic.

 

[JayBee]

I purchased via assignment. Had to pay the downpayment up front. Then pay the rest at closing. Luckily the assignor put down a small downpayment. 3 years ago when I was looking at assignments... some people wanted all the money including profit up front...which could work out to $100K (ridiculous). Then there are some who are good with 5% up front then the rest at closing. The process can be a little overwhelming as you have to figure out what finishes/upgrades the assignor got (I bought from plans), make sure the floorplan is correct. Then you have to deal with the builder who can drag their feet on these things. I got a great deal though. Need to have a good lawyer who has worked with assignments before. And after all that, you have to make sure he builder transfers all their documentation to your name. I remember moving in and them still having everything (including my key) under the assignor's name. Interested gave some good advice.

Not sure if I'd ever to an assignment again.

 

[dogbiskit]

I purchased via assignment and it was a long and arduous process. I found the unit on craigslist and got my realtor to contact the listing realtor. I had recently sold my condo so I had the cash to pay back the seller's deposit plus their profit. A few problems though - the floorplan had changed (unit got smaller by about 60 sq ft plus balcony disappeared) which I realized when viewing the building sales website. It took a few weeks for builder to confirm the floorplan indeed changed and seller to concede on price due to the smaller layout. My realtor was invaluable in helping on this point. Then I went to my lawyer and he said his involvement wasn't necessary for the name change on the original contract. whaaat? I wanted them to just confirm the assignment was legit and they offered to write a letter to builder to obtain confirmation. $350 later the builder ignores the letter so I call and email the builder who finally confirmed in writing to me that the assignment was accepted. Really I did not need a lawyer for this transaction (other than to review contract beforehand as you would be prudent to do when purchasing pre-con). I then had to follow up with builder for the PDI as I didn't trust that they would call me. On occupancy everything was in my name so no issue there and closing was a breeze compared to the nightmare of finalizing the assignment.

It was a TOTAL pain in the arse and completely worth it in the end. A few months later when listings started to show up on MLS my size unit was listing for $60K more than I paid. wooo hooo! I'm not sure I would do it again, though. It was stressful and you really have to take a leap of faith if the unit is still under construction and you can't see the finished product, as was the case with me.

 

[JayBee]

It was a TOTAL pain in the arse and completely worth it in the end. A few months later when listings started to show up on MLS my size unit was listing for $60K more than I paid. wooo hooo! I'm not sure I would do it again, though. It was stressful and you really have to take a leap of faith if the unit is still under construction and you can't see the finished product, as was the case with me.

This is the main thing. I got a (hard to pass up) deal on the unit and once it closed....the price sky rocketed. So, even if there's a downturn and prices drop 20% from now...It still would not be as low as what I paid for it. Besides that, the entire process sucked but I guess it's better than waiting 5 years for a pre-con.

 

[simuls]

If you're willing to put up with the hassles and have the large downpayment, then assignments can be a huge deal late in the process of a development. They usually go for around 10-20% less than current market value of the unit if it had been closed.

 

[MadMax]

Question for anyone? Do you think it's more profitable to assign/sell a unit, or close on the unit and then sell if you already have a primary residence? For instance, you buy pre-construction for 469k. You can assign the unit at a cost of 3k. If you have a potential sale for 60k more than what you paid, minus the 3k for assignment fee that would give you a profit of 57k. Then you would have to pay 50% capital gain on the property on 50% of the profit which would be about 15k. So your overall profit would be about 42k (57k - 15k = 42k). Now, what if you close on the property and let's say it costs 3-4% of the overall purchase price which costs you about 18k. If you sell the unit for 60k more than what you paid, and take away the 18k for closing costs that would equal 42k as well. Or should you consider that your sales price will increase much more once the building is finished and registered and the units are selling for far more than they would as an assignment. My question is do you think it's better to sell as an assignment or sell after closing? Which one would yield the biggest return/profit? Am I missing something in my analysis? Anyone's input would be appreciated. Thanks.

 

[cdr108]

Question for anyone? Do you think it's more profitable to assign/sell a unit, or close on the unit and then sell if you already have a primary residence? For instance, you buy pre-construction for 469k. You can assign the unit at a cost of 3k. If you have a potential sale for 60k more than what you paid, minus the 3k for assignment fee that would give you a profit of 57k. Then you would have to pay 50% capital gain on the property on 50% of the profit which would be about 15k. So your overall profit would be about 42k (57k - 15k = 42k). Now, what if you close on the property and let's say it costs 3-4% of the overall purchase price which costs you about 18k. If you sell the unit for 60k more than what you paid, and take away the 18k for closing costs that would equal 42k as well. Or should you consider that your sales price will increase much more once the building is finished and registered and the units are selling for far more than they would as an assignment. My question is do you think it's better to sell as an assignment or sell after closing? Which one would yield the biggest return/profit? Am I missing something in my analysis? Anyone's input would be appreciated. Thanks.

unless the unit is your primary residence, you will still be paying CG tax on the sale, even after registration.

i don't see any realtor fees in your analysis, which would dramatically affect your bottom line - less $23.5K !
also, what would be your carrying costs from occupancy to closing if you held it until after registration?
there's no guarantee prices will continue upward, especially with new CMHC rules coming to effect on March 18, 2011.

 

[interested]

cdr is right. There is no guarantee that prices will go upward. Let's assume you can make more however. My advice would be:
No one ever went wrong taking a profit.
Make a little less now and avoid alot of headaches.
The guarantee of $57K profit (before tax) may be worth alot better than the possibility of maybe 80K later.
One thing in your calculations. Usually assignments sell for less than 100% of todays supposed value so theoretically you do have some built in escalation if prices stay exactly as they are now if you keep it.
In your example: $469 purchase. 60K profit I assume would be the price you get now assuming the builders price now would be 80-100K more today, not counting for what will happen between now and when you would actually close which in your example you assume(perhaps correctly or not) that prices will increase further.

 

[Condo George]

Captial gains taxable on assignment, realtor fees in effect, benefits are closing costs and secured gains for seller, investor also walks from 2.5% gst rebate applicable on final if not end user. Chk Maple Leaf Sq thread for further info if interested.

 

[district]

Thanks for the replies! JayBee and dogbiskit I was great to read about your experiences in purchasing a condo via assignment!


I am quite interested in an assignment that is selling for $257,000. Can anyone tell me approximately how much to budget for the fees associated with the assignment process (realtors and or lawyers) with the closing costs, occupancy fees, with taxes etc.... I know prices vary (ex: I could have to pay “phantom rent” for only 2 months or I could have to pay “rent” for 12 months before the building is actually registered. I am talking about an average of the totality of the other costs. I know that prices can deviate a lot from that average but I would still love an average.


I have a second question. Aside from the risks mentioned in the article I mentioned earlier, (http://www.fic.gov.bc.ca/pdf/alerts/ConsumerAlert200805.pdf ) are there other risks involved with assignments for the assignee and what are they? I want to make sure I do everything I can to minimize the risks and I am having trouble finding in-depth information about assignments (again, I will get a realtor and a lawyer but I want to get some information before)