Pre-construction condos in Toronto are selling faster than the city can build them, and for good reason. Not only do these condos offer more mortgage flexibility and customization options, you can also purchase a pre-con under an "Assignment Sale". Does the term sound familiar? It's probably because MLS listings have been full of condos being offered via assignment sales over the last few years. This type of sale has skyrocketed in popularity and you definitely don't want to miss out.
With the increase in pre-construction condo assignment sales, it's important for condo buyers to understand what an assignment sale entails.
What Is A Pre-Construction Condo Sale?
A pre-construction condo is a new condominium development that has yet to be built. In the early days of a condo's construction, a developer will sell the legal paperwork associated with the ownership of the condo to a buyer or investor. Once the condo is built and permits from the city of Toronto are acquired, the condo is ready for move in. While the buyer has technically purchased the condo unit, they do not "own" it yet. At this stage, Toronto's land registry has yet to provide the land title. This means that a bank or mortgage lender cannot lend money to the buyer yet. As such, the buyer is only inhabiting it for the time being and for a fee that roughly equates to a monthly mortgage payment.
The buyer only receives the legal title once city officials do their final inspections and the condo is registered with its legal title. Once this happens, the bank will release funds to the developer to complete the condo closing, allowing the buyer to purchase the condo officially. Dependent on the condo, this interim period between a buyer moving in and the construction's closing date can vary; for Toronto condos, it can be anywhere between a few weeks to a couple of years.
What Is A Condo Assignment Sale?
Now that you understand the process behind a pre-construction condo sale in Toronto, we can talk about how a pre-construction assignment sale and purchase comes into play. Assignment sales happen when buyers decide to put their pre-construction condo paperwork up for sale before closing. "Before closing" just means before the buyer has possession of the title to the condo. Simply, they're selling the contract that gives them the right to purchase the condo or condos.
There are a number of reasons why original buyers may choose to put their condos' "right to purchase" paperwork up for sale via an assignment - lifestyle changes, other financial obligations, or an investor just decides they'd like to move onto the next big thing to invest in. Either way, there are pros and cons for both the Assignor (the one selling) and the Assignee (the one buying) in this type of sale, which we'll review below.
Pros for the Assignor and Assignee
What Is A Assignor For Assignment Sales?
In an assignment, the assignor is the original buyer of the condo/condos. They benefit through selling via assignment because they will not have to close on their condo purchase. This means they can realize the condo's value appreciation without needing to shell out additional financing to "own" the condo in the end.
Likewise, depending on the timing of the sale and the assignment occupancy date, an assignor can also avoid occupancy fees. Through the sale, the Assignee takes over the responsibility to pay those fees. Though, this is something that requires consultation with a real estate lawyer to establish. We recommend finding a good one to help you understand all the T&Cs in your original purchase agreement.
What Is A Assignee For Assignment Sales?
In an assignment sale, the assignee is the party that is purchasing the right to buy the condo. In purchasing via an assignment, you get a pricing benefit while still getting the bonus of living in a new suite. With Toronto real estate as pricey as they are, this is one of the top benefits of purchasing a condo through an assignment sale.
Likewise, an assignee who moves forward with an assignment transaction has the potential to take advantage of a much shorter closing period. This is especially true if the new buyer goes through with an assignment at a later stage in the construction process. With a closer move-in date, this allows them to avoid the occupancy fees typically involved in a purchase agreement.
Lastly, the assignee will have to reimburse the assignor all the deposits that have already been paid. However, the assignee only has to pay back the original purchase price and not the costs at today's market value.
Assignment Sale Closing Considerations
A risk for the original buyer is that the they are responsible for any fees charged by the Builder should the new Assignee be unable to close on the home and the assignment falls through. If that happens, the Builder is in their right to request that the original purchaser pay per the terms of the original contract.
Even if everything goes well with the assignment, the assignor will risk being left out of the loop once the sales contract is executed. This is because the builder typically works directly with the new buyer once the sale is finalized. While not an outright issue, it will make it difficult for the assignor to receive important updates during the build. As such, it's vital that a lawyer is involved to keep everyone updated.
The last con for consideration as an assignor is the potential risk of losing out on future gains of the construction by selling early. With downtown Toronto condos reaching sky-high prices, holding out and waiting to resell later on may allow for additional appreciation gains in the long term. This potential benefit is something they're opting out of by going through with an assignment transaction.
As the new buyer on a pre-construction unit, you will have to sign the same contract as the original buyer. This means that you may end up taking on risks that the original buyer missed in the agreement. To avoid this, we highly recommend hiring a lawyer well-versed in assignment transactions to ensure that you understand the terms ahead of time.
With anything that requires legal involvement, there will be fees. Legal handling of the closing on an assignment is much more complicated than a resale condo closing. This means that you might end up forking over any savings from the condo's price towards the additional complexity that comes with an assignment sale.
Likewise, with purchases of new homes in Toronto, there will be a land transfer tax. This is true even for assignment sales. As the one closing on the home, the assignee will end up owing Toronto and Ontario land transfer taxes.
Another chunk of your savings may also unexpectedly go towards the down payment of this new home. While the price of condos sold through assignment are cheaper than your typical Toronto home, assignment sales have a unique caveat when it comes to down payments; An assignee is required to match the down payment made by the original buyer. Depending on the type of assignment, this could end up being as much as 25% to the developer. Whatever it ends up being, it's a far cry from the standard 5-10% seen in normal Toronto transactions.
Clearly, assignment sales can be great for both assignee and assignor alike, bringing value to both parties involved. However, there are a number of complexities that come with condo assignments and they should be considered before closing on your dream pre-construction home. As such, it's imperative to discuss any potential risks with a trained real estate agent and lawyer before signing an agreement!