Are free assignments actually free? If you’ve ever bought a pre-construction condo or have done some research, I’m sure you have come across something called “Assignments”. On certain pre-construction projects, you’ll see incentives such as “Free Assignments, Value of $5,000”. The question we’ll break down in today’s Insight Article is whether this so-called free assignment is actually free or is it marketing lingo just thrown in there to grab your attention… because you know, who doesn’t like free?
What is an Assignment and its Purpose? Let’s start with some background and context. An assignment is essentially the process in which one person sells the rights and obligations of a contract to someone else. In the case of a pre-construction condo, when you assign a contract to someone else, they will get the benefit of closing the specific unit stated in the contract upon its completion in addition to fulfilling the other contract obligations. A similar process takes place when you are transferring a leased car to someone else.
The Origins – The reason why assignments became such a big incentive on basically every pre-construction project is because back in the day (circa 2008), it was a very common strategy to buy pre-construction and sell the contract to make a profit. This was all before the CRA decided to clamp down on these capital gains plus builder’s also started requiring more than just 5% deposit.
So Does Free Mean FREE? Yes and no. Prior to these free assignment incentives, it was the wild wild west for contract assignments. I’ve heard of builders charging $33,000 to allow assignments before. So from that perspective, yes “Free Assignments” nowadays are free. However, in recent years, there have been additional “legal fees” added in order to have an assignment executed. I’ve seen legal fees upwards of $3,000 – those are some expensive lawyers! With the larger builders, it’s becoming more common to waive the legal fees. We shall see how “free” the assignment and legal fees become when the current projects are due in a few years.
Knowing how the assignment process works is critical when it comes to selling or buying a pre-construction condo on assignment because its not a standard agreement of purchase and sale. There are many ways to structure the deal depending on the position of the seller or buyer. This includes a seller that needs to sell because they can no longer close, whether it be due to the new stress test or for personal reasons. On the other hand, a buyer could be willing to close fast with a deal in the assignment market (if you know where to look for assignments, you can usually find a few. We know where to look) as long they have the funds available to fulfill the seller’s needs.
Traditionally, buying a home that is not on assignment requires 5-20% down payment. However, with an assignment, this is different. Most of the time, the seller wants to be relieved of most of their obligations in their contract. This is important is because it requires more than your usual 5-20% of the purchase price to fulfill the transaction.
Here’s an Example to Put Things into Context:
The original pre-construction buyer, Bob, purchased a pre-construction condo unit in 2017 for $500,000 and paid 20% deposit to date (i.e., $100,000).
Fast forwarding to 2020, Bob lists his property as an assignment for $600,000 dollars.
Jane wishes to buy Bob’s pre-construction assignment for $600,000 because it’s under market value. However Jane doesn’t need 20% of $600,000, or $120,000. Jane actually needs $200,000 or 33% of the funds in order to fulfill the assignment in cash.
There are 2 streams of cash in this example:
- Jane needs to pay Bob for the deposits that he’s paid to date with the builder, or in other words, his initial $100,000 deposit amount.
- Jane also needs to pay Bob his profits, $600,000 – $500,000, or $100,000.
Whoa, $200,000… and in cash?! Why can’t I use a mortgage for this $200,000?
In order to get a mortgage with a bank, you must own the property (i.e., be on title). When you close the assignment transaction, you have just bought a contract; you haven’t exactly closed on the property yet so the title would still be under the original buyer (title hasn’t transferred yet at this point). As a result, you cannot get a mortgage on the $200,000 amount.
If you have the capital ready, we can definitely find you a great assignment deal. We’ve executed many assignment deals for our clients who were in similar situations before. You just need to have the funds ready.
Read the Fine Print! When you are selling your assignment, you need to watch out for a few things in addition to whether or not the “Free Assignment” is actually free. One of the key components is knowing who and where to sell the assignment. The builder will not allow you to simply put your assignment on MLS 90% of the time, thereby ultimately reducing your unit’s visibility on the market. Trust me when I say that I’ve seen a lot of Realtors just list an assignment on MLS without knowing because they’ve never read through the original 30-50 page agreement of purchase and sale. You must be careful of these situations because oftentimes, there are provisions in the original agreement that says if you post the contract for sale on MLS, you are violating the contract and the contract can be terminated. This means that all appreciation you have gained can disappear – just like that! I’ve seen cases of this happening before, so you MUST be careful, especially when listing your assignment. This is just one of the many reasons for working with the PPTO Team as we have many assignment deals before.
The Wrap – So whether you’re looking for an assignment deal or looking to sell your pre-construction condo via an assignment, reach out to me at Zhen@PrimePropertiesTO.com so that we can align your strategy and positioning. We’ll be sure to have you come out on top in this assignment game!
Until Next time, happy real estate-ing,