Real Estate
Pre-Construction 201 - The Ins and Outs of Assignments
With over 500 new Pre-Construction projects currently available on the GTA market, it can be very difficult to determine which one is the right fit for you. As first-time homebuyers or experienced real estate investors, it is important to understand all the options that are available to you prior to closing. Here in this article, we talk about the ins and outs of Assignments in Pre-Constructions.
What Are Assignments?
Assignment (also known as wholesaling for real estate investors) is the process of which the original Buyer sells the Agreement of Purchase and Sale (APS) contract they have with the Builder (current owner of the title and property of interest) to a new Buyer. In legal terms, the original Buyer is known as the Assignor and the new Buyer is the Assignee. It is important to note that an assignment happens before the original Buyer/Assignor closes the property and are in full possession of it. As such, the new Buyer/Assignee of an assignment is essentially replacing the original Buyer/Assignor and will complete the final sale with the Builder.
Do Assignments Only Happen with Pre-Construction Condominiums?
No, it’s actually possible to assign any type of property, assuming there aren’t restrictions against assignment in the original APS.  As such, the original Buyer/Assignor of any real estate property could sell their interest in that property before taking possession of it. Assignments are commonly referred to as wholesaling in the real estate investing world and is an effective business strategy.
Why Would Someone Want to Assign Pre-Construction Condominiums?
In pre-construction condo transactions, there is a long lag time between when the original APS was completed, when the Buyer can move in (also known as the interim occupancy period) and when the Buyer takes possession of the property. From start to finish, it could take up to years and it’s possible that the Buyer’s circumstances have changed during that time.
Additionally, assignment sales are common with speculative investors who buy pre-construction condos, but have no intention of closing on them. In these cases, the investors are looking to sell the APS to a new Buyer who desires a brand-new property without having to wait for several years and are willing to pay a premium for the luxury. As such, investors are able to capitalize on the quick appreciation and capture the profits immediately.
Who Pays Who in An Assignment Sale?
In pre-construction condos, the transfer of funds between the Assignee, Assignor and the Builder can sometimes be very confusing. As such, here we try and break it down with the following example.
- In 2020, You buy a pre-construction condominium unit from ABC Builder for $400,000 with a total down payment of 20% ($80,000). The project is set to be completed and registered with the city in 2025. When that happens, the official title transfer takes place between you and the Builder. In exchange, you’re expected to complete the transaction and pay the builder the remaining balance for the unit ($320,000).
- In 2024, You decided to sell the APS for the pre-construction condominium unit to a young couple. In this scenario, you are the Original Buyer/Assignor and the young couple the new Buyer/Assignee. After negotiating back and forth, the total purchase price is $500,000. This includes the purchase price agreed upon in the original APS ($400,000) and the assignment payment ($100,000 profit) that you (the Original Buyer/Assignor) will make from this assignment. As negotiated, the young couple (the new Buyer/Assignee) will pay $180,000 to you (the Original Buyer/Assignor), due immediately. This includes the $100,000 profit and the $80,000 deposit that you (the Original Buyer/Assignor) originally paid to the Builder back in 2020. Note, the total purchase price and timeframe for the assignment payment can be negotiated.
- When the building is completed and registered with the city in 2025, the official title transfer now takes place between the young couple (the new Buyer/Assignee) and the Builder. In this scenario, the young couple (the new Buyer/Assignee) are expected to complete the transaction and pay the builder the remaining balance for the unit ($320,000).
Can You Negotiate Terms in an Assignment Sale?
In an assignment sale, the (the new Buyer/Assignee) is taking over the (the Original Buyer’s/Assignor’s) original APS and are not allowed to renegotiate the price or terms of the APS with the Builder.
Builder Approval and Additional Fees
Your Agreement of Purchase & Sale informs you of your rights to assign the APS. While most builders allow assignments, there is usually an assignment fee that must be paid to the Builder which can vary from $800 to $8000. This fee is typically paid by the original Buyer, unless otherwise negotiated with the Assignee. Additionally, there may be other requirements as well, the most common being that the Builder has to approve the assignment.
In addition to the Builder assignment fees, you will likely have to pay a real estate commission to get assistance with your assignment. Most pre-construction APSs from Toronto Builders have marketing clauses that restrict you from posting it on the Multiple listing Service (MLS) or advertising it online. Â So, unless you find a new Buyer and draft the assignment papers yourself, there are real estate sales representatives who specialize in assignment sales and have a database of potential Buyers and investors looking for assignments.Â
Legal fees are also another consideration and you can expect to pay higher legal fees than you would for a residential resale as assignments are far more complicated.
Builder Approval and Additional Fees
Your Agreement of Purchase & Sale informs you of your rights to assign the APS. While most builders allow assignments, there is usually an assignment fee that must be paid to the Builder which can vary from $800 to $8000. This fee is typically paid by the original Buyer, unless otherwise negotiated with the Assignee. Additionally, there may be other requirements as well, the most common being that the Builder has to approve the assignment.
In addition to the Builder assignment fees, you will likely have to pay a real estate commission to get assistance with your assignment. Most pre-construction APSs from Toronto Builders have marketing clauses that restrict you from posting it on the Multiple listing Service (MLS) or advertising it online. Â So, unless you find a new Buyer and draft the assignment papers yourself, there are real estate sales representatives who specialize in assignment sales and have a database of potential Buyers and investors looking for assignments.Â
Legal fees are also another consideration and you can expect to pay higher legal fees than you would for a residential resale as assignments are far more complicated.
What are the Tax Implications of Assignments?
Assignments are typically associated with 3 major taxes: income tax, Harmonized sales tax (HST), and land transfer tax (LTT).
When it comes to the income tax, the Original Buyer/Assignor is taxed based on the primary purpose for purchasing the property or interest in the property. If it is determined that the intention of the taxpayer at the time of purchase was to resell the property for a profit, then 100% of the profits made from this transaction is taxable when considered as business income vs. 50% of the profits being taxable when considered as capital gains. If you plan to treat your assignment sale as a capital gain, you should ensure that the facts support your claim that you intended to hold on to the property long-term either as a personal use property or as an income producing property.
HST applies to newly constructed homes or substantially renovated homes, but does not apply to resale homes. In regards to HST, Canada Revenue Agency (CRA) finds that if a person buys a property for the primary purpose of purchasing the property or interest in the property then that person (the Original Buyer/Assignor) will be considered a Builder, even if they never built a home, under the Income Tax Act. Once you are considered a builder you must charge HST on the transaction. Believe it or not, the official position of CRA is that you must charge any applicable HST on the profit being made and the deposits. As such, HST in assignments are typically included in the purchase price to the Assignee and would therefore have to be paid by the Assignor.
With respect to LTT, the new Buyer/Assignee will also be responsible for paying it when it is due. In most provinces, such as Ontario, LTT is calculated based on the purchase price of the home and the marginal tax rate. In certain municipalities, such as Toronto, there are municipality LTT. Fortunately, if you are a first‑time homebuyer, you may be eligible for a refund of all or part of the LTT. You can read more about LTT here.
Remember, always get tax advice from a certified professional accountant and lawyer.
Assignments VS. Residential Resale: Which is Better?
Pros of Assigning VS. Residential Resale
- Get your deposit back and capture your profit sooner
- Avoid paying land transfer taxes
- Maximize your return if prices are declining and you expect them to continue to decline
- Pre-construction Condo doesn’t suit your needs – sometimes it just makes sense to move on
Cons of Assigning VS. Residential Resale
- Pay Income Tax and HST, depending on the intention for purchasing the property
- Marketing restrictions that was included in the original APS
- Unestablished Market Price – As the condominium building hasn’t registered and there haven’t been any resales yet, which can be difficult to determine how much the property is now worth.
Assignment sales can be complicated, so you want to make sure that you’re working with a good accountant, agent and a lawyer who are experienced with assignment sales. Truthfully, there is no one right answer for whether you should assign a pre-construction condo that you recently bought, or wait for the building to register and then sell it as a residential resale because it is a case-by-case situation. If you’re still thinking of doing an assignment for your property of interest or require more information, feel free to contact us below.
What Should I do Next?
While your real estate agent can help you understand some parts of the assignments, getting an opinion from qualified accountants and lawyers are also essential. As such, we advise you to speak with a real estate certified professionals or get in touch with us so we can refer you to an expert.
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