We always advise our investors to make strong long-term decisions when it comes to real estate. Buying a pre-construction condo with the intention of selling it on assignment isn’t one of them. For the very reasons we tell them why not to sell a pre-construction condo by assignment are the reasons why you may be inclined to buy a condo assignment.
WHAT IS A PRE-CONSTRUCTION CONDO ASSIGNMENT?
A purchaser of a pre-construction condo investment will sometimes choose to sell their contract with the builder before they officially take possession. Because they don’t yet own the condo itself, they are selling their Agreement of Purchase and Sale with the builder to a new buyer. This transaction is referred to as an assignment.
WHEN CAN A PRE-CONSTRUCTION CONDO ASSIGNMENT TAKE PLACE?
Assignments typically take place if the original purchaser’s financial situation has changed, if they’ve had a change of heart, or are simply looking to “flip” the property. Flipping pre-construction condos can be a strategy some investors use to avoid paying closing expenses and cash out before registration.
However, there is one caveat you should be aware of before purchasing — all assignments must be approved by the builder and not all builders will consent. Some even have a “No Assignment” clause in the Agreement of Purchase and Sale. Those that do permit assignments will often charge the Assignor an assignment fee.
KEY BENEFITS TO BUYING A PRE-CONSTRUCTION CONDO ASSIGNMENT
BUY A NEW CONDO FOR LESS
As the buyer you are able to purchase a product that is typically sold-out for a price that is likely no longer available. The price per square foot should ideally be less than today’s pre-construction prices.
Not only are you able to get a brand new condo but you’re able to get it for a price that no longer exists in today’s market.
GREATER NEGOTIATING POWER
Toronto condo assignments can be sold/purchased at any phase before registration. So even a condo that is ready for its residents to move in still has some elements throughout it that need finishing. Chances are some of the amenities won’t function properly, common spaces will be unfinished, hallways may be taped for paint, and in some cases, elevators may even be grounded.
With the building in less than tip-top shape, as a buyer, all of these elements become excellent factors when it comes to negotiating on price.
BUYERS HAVE THE UPPER HAND
After construction it’s not abnormal for investors who are misguided by their agents (or just want to cash out quickly) to sell before they take possession. What this does is create a massive amount of inventory in a building, which means buyers have more choice at a time when the building is still a work-in-progress. Additionally, investors are motivated to negotiate because they want out of their contract prior to the condo’s registration date, especially if there’s lots of inventory.
This inventory surge gives buyers the upper hand, driving down offer prices and saving you money on a brand new product.
PICK UP EQUITY
One of the reasons why buying a pre-construction condo is so appealing is the ability to build equity as the condo is being constructed. When someone is selling a condo before closing, they are typically leaving some of the equity that the condo has earned on the table for you to inherit.
Toronto’s condo market has remained strong and condos, even pre-construction condos, are generating significant equity each year.
THINGS TO KNOW WHEN BUYING AN ASSIGNMENT
YOU CAN’T RENEGOTIATE THE TERMS OF THE CONTRACT
When buying a condo assignment you are inheriting the contract from the original purchaser as it already exists. It’s important to have your lawyer review the contract but note that the terms the Assignor agreed to are no longer negotiable.
WHAT YOU’LL HAVE TO PAY UPFRONT
A typical deposit structure for a pre-construction condo is 15% over the first year and remaining 5% due on occupancy (3 to 4 years later). Depending on what phase the building is in when you purchase the assignment, you will pay the Assignor the deposits they have already paid to date. The remaining balance will be paid to the builder. Overall, this could be 15-20% up front.
In rare instances, you can purchase an assignment with as little as 5% down depending on what the Assignor’s terms are. By putting less money down, the Assignor has to wait until registration to receive their profits. Although this is not the norm, the likelihood increases as the registration date nears and the building is almost complete.
PRE-CONSTRUCTION CONDO CLOSING COSTS TO BUDGET FOR WHEN BUYING AN ASSIGNMENT
When purchasing a condo assignment you will be responsible for all the closing costs when the building is registered with the city. Closing costs include Land Transfer Tax, Development Charges, Utility Connection Fees, HST and any legal fees. It is also at registration that your mortgage will officially begin.
Keep in mind, you are completely exempt from HST on a pre-construction condo if you plan to use the property as your principal residence. Investors who are leasing their condo will need to pay HST upfront to a maximum of $24,000. Your lawyer can file for a full HST rebate, refunded approximately 4 to 6 weeks later, provided you have a one year lease in place.
PAPERWORK IS MORE COMPLICATED
The paperwork involved with an assignment is a bit more complicated than your standard real estate transaction. Many agents and even real estate lawyers are not familiar with this type of sale, so make sure you use an agent who’s familiar with how to complete an assignment sale.
For this reason, it’s important to budget a little extra for your legal fees. But with all that you’ll be saving in the long run, this shouldn’t be an issue.
YOU MAY STILL GET TO CUSTOMIZE YOUR SUITE
Depending on the timing of the assignment, you may be able to select your own finishes. The builder contacts the buyer typically one year prior to completion for these custom details.
Be sure to read our recent blog, Ten Toronto Condos Occupying in 2019 to see which projects may have assignments available. If you’re interested in buying a condo assignment, book a call with us here to get started!