Pros and Cons of buying and selling an assignment

Pros and Cons of buying and selling an assignment

Written by Yan Zhou

For Buyer:

Pros:

1. You may get a discount compared to a brand-new property. Some assignment sellers have difficulty to obtain mortgage or try to avoid paying for the closing costs, so some sellers are willing to sell with a discount, normally it is about 5%. 
2. You may be still able to pick the interior colors. Please check with the seller’s agent. This will save you some money as you can save some money on renovation in the long run. 
3. Long closing may be a benefit to some buyers. If you don’t have the funds ready for closing, buying an assignment may be an option for you since the final closing date maybe six months from today. If you buy a resale property, seller normally looks for quick closing. (30-60days nowadays)
4. Assignment is an area that buyers/buyer agents may over-look. Since the real estate inventory is so low right now, why not check out assignments too?
5. Buyers are tired of bidding wars. I get it as there is a lot of less competition when buying an assignment. Please read my article about bidding wars. https://gtahome.com/2022/02/15/is-it-a-good-idea-to-list-a-property-at-a-lower-price/

Cons:

1. It may require a lot of cash deposit from you, and you have to wait until closing to move in/rent out. You are not only pay for the deposit made by assignor to the builder, but you will also need to pay for the premium of property appreciation. I will give you an example here. Let say Lucy paid $100k to the builder for a property originally priced at $500k. You would like to purchase this assignment from Lucy, and you agree to $700k current market value. So, you will need to pay $100k + (appreciation in price $700k-$500k) = $300k to Lucy now compared to paying the 5% deposit when you sign an agreement for purchase and sale for a resale property.
2. You won’t be able get a conventional mortgage until the final closing date, even you move in the property under interim occupancy. The reason behind is that almost all lenders would secure their loan on title and there is no title to secure until final closing date.
3. Builders may cancel the project and yes you can get the initial deposit back. But it will be very difficult to chase the original purchaser (assignor) for the big profit/capital appreciation. 
4. If you are unsure or you don’t have enough data to support your purchase decision, you may be buying it on speculation. 
5. You may end up paying extra for the closing cost compared to buy a resale property. Please ask your lawyer to review the original purchase agreement carefully as there some costs, such as development levies or utility hook up cost that you may not notice.
6. The bank may not be willing to lock in your mortgage approval if the closing date is more than 3 months from today. You may be end up paying for higher interest or at worst, you may not be able to obtain mortgage from the big banks if your circumstances changes. 

For seller:

Pros:

1. No need to worry about getting mortgage. If you already have multiple investment properties or are self-employed, getting a new mortgage may be tougher than you think. 
2. No surprise to see the final product. Yes, you may fully understand the layout of the unit. However, let say you buy a unit in downtown Toronto condo, the view may be totally blocked, and you did not even notice. Or it may look big enough as a bedroom on floorplan however it may be still to too small to fit in a bed with two bedside tables. 
3. No need to worry about the closing cost such as land transfer tax, levy and other miscellanies expenses. This amount of funds can be easily over $30k and it may consider a large amount of cash to some purchasers. 
4. Realize the gain now. if you expect the property market value to drop, why not lock in your profit now?

Cons:

1. When you are selling the assignment to the assignee, Canada Revenue Agency (CRA) will consider you as “mini builder” and the 13% HST will be applied on your initial deposit paid to the builder. I am not a tax professional, so I earnestly ask you to speak to your accountant for this. The HST can dramatically reduce the profit you think you get.
2. Yes, we know there is no capital gain tax on your primary residence. However, CRA may consider selling assignment as a business income which is fully taxable. So, you should check with your accountant before you make the decision. 
3. The builder may already have a clause in the purchase agreement prohibit real estate agent to list your assignment on MLS or on internet. If you still do it without builder’s approval, you may end up in breach of contract and losing thousands of dollars.
4. You may sell the assignment less than it should be if there is not enough real estate market data to support your decision. 
5. Even you sold the assignment, and the new purchaser cannot close when the property is built, the builder can still go after you since you are still legally bound to the contract. Builder may give you a last-minute notice and you may not have enough time to prepare for the mortgage due to such short notice. 

If you agree or disagree to what I said above, feel free to comment below. If you have questions about the real estate market, Toronto, Markham, Richmond hill, Vaughan or otherwise (there are some great opportunities in areas you may not notice, please give me a call, I would be happy to help. If you know of someone thinking of buying or selling, please let me know, I will take extra good care of them. 

Your friend in real estate,

Yan Zhou

Sales Representative

HomeLife Landmark Realty

February 16^th, 2022