How to Sell a New Condo on Assignment
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Did you purchase a pre-construction condo in Ontario, and are now looking for a way to sell it on assignment? What exactly are assignment sales?
Selling on Assignment means selling the paperwork for your purchase, before the condo is actually completed. You are “assigning” your Agreement of Purchase and Sale over to a new buyer.
Assignment sales can be a complicated process, and require approval from the Builder. The approval must be in writing, and often contains substantial costs and restrictions.
Here is a basic guide about how to sell a pre-construction condo on assignment. Hopefully it will help you to make an informed decision on whether it’s the right path for you.
Pre-Construction Condos
Although assignment sales can apply to all kinds of new-construction real estate, including single family homes, they are predominantly utilized for pre-construction condos.
Most new condos are sold as pre-construction (i.e. construction has not started yet) and buying decisions are made entirely off of marketing materials (floor plans, brochures, site maps, etc).
Most of the time, a developer cannot begin construction until 60%-70% of the building is pre-sold. This is a banking reqirement. Banks (Lenders) will not provide the financing for construction loans that the developers need to build the building until this threshold is met.
When you buy a pre-construction condo, you aren’t directly buying real estate, you are entering into a business contract to buy the real estate once it is completed, which could be several years away.
You secure the unit with a deposit, or a series of deposits. Once the deposits are paid, you are not required to put down any more money until final closing. Final closing is when the building is finished and the condo corporation is registered with the municipality or region.
At this point legal title for the unit is transfered to your name, and you pay the balance of the purchase price, usually through mortgage financing.
NOTE: Every property bought as a real estate investment in Canada must have a minimum 20% deposit downpayment to qualify for a mortgage at closing. This means if you provided only a 10% deposit to the builder through a special incentive, you must provide an additional 10% deposit at closing.
What Is An Assignment?
An Assignment of an Agreement of Purchase and Sale is when the original purchaser sells their contract to another buyer before final closing. They aren’t selling the actual property since they don’t own it yet.
The new buyer is essentially taking the place of the original purchaser.
Assignor (Seller): The person who originally purchased the pre-construction condo and is now selling their contract to a new buyer.
Assignee (New Buyer): The new person that is buying the contract and taking over in the Seller’s place.
Assignment sales can be at par, where the new buyer pays the same price as the original purchaser (who is now the Seller). They can also be at a higher price than the original, where the new buyer pays a premium and the original purchaser (now the Seller) makes a profit. Or they be at a lower price than the original, where the new buyer pays a lower price, and the original purchaser (now the Seller) takes a loss.
Things to Consider
Selling a unit on assignment is not a simple task. Always get professional legal and tax advice before proceeding so that you can fully understand the implications for your unique situation.
Seller Liability
Selling a contract on assignment does not remove all responsibility or liability from the seller. If the new buyer fails to close, the original buyer (now the seller) can be liable to complete the purchase.
Nothing is Guaranteed
Just because you offer a property for sale on assignment does not guarantee that you will find a buyer willing to offer you a price that you find acceptable.
If your closing is soon, always create a Plan B by speaking with a mortgage broker to determine how you can get financing to close the transaction if a buyer cannot be found.
Even if you have to go to a “B” or “C” Lender, or private money to close the deal, while expensive, this would prevent a breach of contract and default on your purchase and the loss of your deposits.
Selling Price
When you sell a unit on assignment, you are often selling the property to another investor, and in today’s market, you may be offered less than your original purchase price.
Costs
Even though you often see “Free Assignment” being advertised, there are significant costs to selling an assignment that no one may have told you:
Developer Assignment Fees – The fee to sell your unit on assignment can sometimes be tens of thousands of dollars. Even if you have a “free assignment” clause, the developer typically includes an administration fee to approve the assignment request and process the paperwork involved.
Legal Fees – There are extra legal fees on assignments associated with drafting and reviewing the contracts by lawyers and closing the transaction.
Real Estate Commissions – If you want a Realtor to sell your assignment and find a new buyer for you, they are typically paid a commission for their services that is based on the final selling price. Assignment commissions can be higher than they are for a resale property because of the more difficult nature of the sale.
13% HST on Profit – the Canada Revenue Agency (CRA) is cracking down on people trying to quickly flip properties for financial gain and may determine the profit on the transaction to be “business income”, subject to HST which you would be responsible to pay which is based on your initial “intent of purchase”.
Profit Taxed as Income vs. Capital Gain – The CRA may also classify the profit as business income subject to 100% full taxation instead of a capital gain (where only 50% would be taxable**). Since business income is added to your income for the year, you would pay an extra $27,765 for every $100k in profit based on the highest marginal tax rate by selling on assignment.
Most successful investors make money in real estate by buying and holding for the long-term.
You are usually better off to close on the property and then sell it, and even better off on closing the property and renting it out for several years because many of the above fees and taxes are reduced or go away entirely.
Always seek professional legal and tax advice before proceeding with an assignment.
Process to Assign a Unit
Assignments are complicated and legally binding agreements. It is very important that you work with an experienced realtor, lawyer, and accountant to help you navigate the process.
Appropriate clauses and conditions must be put in place to protect you.
Understanding Your Contract
Each builder, each project, and each contract is unique. Take the time to understand your contract and to ensure that the original Agreement of Purchase and Sale with the developer includes an Assignment clause.
Developer Approval
Developers almost always impose strict terms and conditions concerning assignment transactions.
Developers will often include restrictions that prevent assignment sales until a certain percent of the building has been sold, and specific time limits.
Most developers will not allow assignments to be posted on the MLS, any websites or any public forum. This severely limits your potential audience. Developers monitor this activity closely, and it can create very serious legal repercussions for you if you break the rule.
On the times when developers do allow MLS assignment listings, they may require you to only list with agents employed by them.
Getting the developer’s approval to assign a contract is mandatory. The request must be sent to the developer in writing, and they will provide a formal approval once all of their conditions are met.
This often includes:
- Builder’s Assignment Form: developers typically have an assignment form that must be completed.
- Paying the Assignment Fee: the fee to assign the unit including legal and administration fees is typically around $1,000 and can be as high as $10,000+ or even a percentage of the purchase price.
- Identification: the new buyer must provide copies of identification, mailing information and contact details as required by the developer
- Mortgage Pre-Approval: the new buyer must provide proof to the developer that they have qualified for financing with a mortgage pre-approval from a major financial institution. The mortgage amount should be based on the new purchase price, not the original contract.
Not all contracts include the ability to assign the property. However, developers will often allow a property to be assigned if a fee is paid. Developers will usually allow previous incentives like cash back at closing, rental guarantees, free condo fees, etc. to be carried forward to the new buyer as part of the approval process, but make sure you get clarification before you proceed.
List the Assignment
If you choose to work with a realtor, and are ready to list the assignment for sale, there are forms to be signed. In Ontario, these include:
- Assignment Listing Agreement
- RECO Working With a Real Estate Agent
The listing includes all of the information about the property and any incentives that are transferable to the new buyer. This helps potential buyers to properly assess the opportunity.
Because most assignable listings for sale are not on the MLS, they are equivalent to an exclusive listing. You are relying on your agent’s network and sphere of influence to find a new buyer.
To determine the Listing Price for a property, realtors normally look at recently sold comparable sales in the area.
With assignments, there is no database to compare against and it takes extra work to determine the fair market value. Usually, that falls somewhere between recently sold existing properties and similar new pre-construction project launches in the area.
Find a New Buyer
Finding a buyer can be tricky since developers often do not allow assignments to be advertised on any MLS (Multiple Listing Service), realtor websites, or even realtor forums. This is why selling a unit on assignment can be particularly difficult.
Negotiate the Contract & Complete Paperwork
Assignment sales involve a lot of paperwork, and it is critical that the Assignment Agreement protects the interest of all parties involved. The due diligence of an experienced lawyer is crucial here due to the complexities involved.
Offers will be submitted to you using an assignment agreement, including:
- Contract Details (Selling Price, Closing Date of Assignment, Payments, Incentives, etc.)
- Terms (Handling of Occupancy Fees, Closing Costs, Interest on Deposits, etc.)
- Conditions (Review of Original APS, Developer’s Approval, Lawyer Review, Financing, etc.)
Accepted Deal, Payment & Closing
After the Assignment Agreement is completed and signed by both parties, it should be sent to the lawyers for both the buyer and seller to review. Contract terms may need to be added, removed, or renegotiated.
Once everyone is in agreement, then the request for approval of the assignment should be made to the developer. Supporting information, completion of the developer’s forms, and required fees will need to be provided before the builder will grant their approval.
Once developer approval is granted and all conditions of the contract are met, then the assignment sale is complete or “closed” and the new buyer takes over from the seller. From this point the developer typically only communicates with the new buyers for updates, finishing selections, property closing, etc.
The new buyer will provide an initial deposit for the assignment within one business day of an accepted agreement. Those funds are held by the lawyers until the assignment deal closes.
At closing of the Assignment, any remaining payments will be remitted to the Seller’s lawyer and then ultimately to the Seller.
It’s at this time that the new Buyer is required to reimburse the Seller in full for any deposits that the Seller has already paid to the developer. If there is any additional profit going to the Seller (based on the assignment sale price), that profit portion can be paid out in one of two ways, and is subject to negotiation:
1) All Profit Upfront: Once the assignment deal closes, the Seller will receive the remaining deposits and all of the profit.
2) Profit Paid Later: Once the assignment deal closes, the Seller will receive the remaining deposits but will not receive the profit until a later date (often at closing of the original property).
Example:
David and Jennifer bought a pre-construction condo from a developer three years ago for $600,000 with a 20% Deposit ($120,000). Jennifer just had a baby and they have decided to sell the property on assignment because they need to buy a bigger house. They find a new buyer willing to pay $700,000 for the property. Here are the two scenarios which show what the payment would look like if all of the profit is paid upfront or paid out after final closing
| Assignment Payment Scenarios | Profit Upfront | Profit at Final Closing |
|---|---|---|
| Assignment Price | ||
| Price Paid by New Buyer | $700,000 | $700,000 |
| Original Purchase Price | $600,000 | $600,000 |
| SELLER PROFIT | $100,000 | $100,000 |
| Original Deposits | ||
| DEPOSITS PAID BY SELLER | $120,000 | $120,000 |
| Payments made by New Buyer at Assignment Closing | ||
| Return of Original Deposit | $120,000 | $120,000 |
| Seller Profit | $100,000 | |
| TOTAL PAID TO SELLER AT ASSIGNMENT CLOSING | $220,000 | $120,000 |
| Payments made by new Buyer at Final Closing | ||
| Seller Profit | $100,000 | |
| TOTAL PAID TO SELLER AT FINAL CLOSING | $100,000 | |
| TOTAL PAID TO SELLER | $220,000 | $220,000 |
Tax Implications
NOTE: If you are considering selling your unit on assignment, get professional advice from a tax accountant. The information on this page is intended as a general guide only, and is not to be construed as tax advice, either express or implied .
Any gain that you make by selling a unit on assignment is subject to income tax and may have GST/HST implications too. Here are a couple of Canada Revenue Agency (CRA) publications on assignment sales:
Assignment of a Purchase and Sale Agreement for a New House or Condominium Unit:
Residential Property Flipping Rule
Inclusion Rate
The inclusion rate is the percentage amount that is taxable on capital gains. In Canada, the capital gains inclusion rate is 50%. What that means is, if you make a profit when you sell a property or other investment, you only have to pay tax on 50% of the profit. The rest of the profit is tax free.
Inclusion rates also apply to allowable capital losses, so if you lose money on the sale of a property or an investment, you can only claim 50% of that loss when calculating your taxes.
But the inclusion rate on capital gains is only part of the puzzle.
The tax treatment of a real estate investment is dependent on two things: your intention at the time of purchase and the length of time the property is held (after closing).
If you intended to resell (flip) the property for a quick profit, the gain will not be treated as a capital gain, but will be treated as business income. Business income has a 100% inclusion rate. In other words, whatever profit you make will be fully taxable.
If your intention on the other hand was to purchase a long-term investment, the gain from an assignment is a capital gain which, as we discussed earlier, is at the 50% inclusion rate**.
So what is the cutoff point between a “quick profit” versus a “long-term investment”?
If the property was held for less than 365 days, then gains will be automatically considered business income unless there is an exception for a “life event” including: growth of a household, separation, disability or illness, employment change, insolvency, or an involuntary disposition.
The CRA is cracking down on people who flip properties on assignment so proceed with caution and be prepared to support your claim with documentation and evidence if you plan on claiming it as a long-term investment subject to capital gains.
Also be very careful if you were planning to live in the property as a principal residence because if you sell the unit on assignment, then the property was never inhabited as a principal residence and therefore cannot qualify for a principal residence exemption.
GST/HST Payable
All assignment sales are subject to GST/HST and everyone must collect GST/HST on their assignment profit and remit it to the CRA. Since assignment sales typically have GST/HST included in the purchase price, the Seller would be responsible for paying this. Paying GST/HST on deposits provided to the builder no longer applies.
REMINDER: You MUST get professional tax advice to determine the potential implications for your own unique situation and for the proper classification of your assignment sale.
Conclusion
Selling an assignment can be a complex and difficult process. It’s not for everyone. If you are considering selling on assignment, you must do extensive homework to protect yourself. First, make sure that the developer will allow the process. Make sure that you know the risks and costs involved. And proceed only with expert guidance from a trusted realtor, real estate lawyer and tax accountant.
author: Randy Selzer
**in June 2024, the federal Government of Canada announced that capital gains inclusion rates were going to be modified. The basic 50% inclusion rate was maintained, but any capital gains over a $250,000 threshold, in any calendar year, would be subject to a 66.66% tax inclusion rate.
This announcement, however, was never passed into law. At the time of this publication, the inclusion rate has been readjusted back to the basic 50% with no surcharge at the $250,000 threshold.
categories: assignments for sale, assignment sales, condo assignment sales, what is an assignment sale, assignment sale, assignor, assignee, pre-construction, presale, condo, condominium, developer consent, agreement of purchase and sale (APS), assignment agreement, interim occupancy, market risk, hst, legal risk, financial risk, toronto assignment sales, mississauga assignment sales, ontario assignment sales, investors
