Assignment Sales: The Thrill of the Real Estate Game
Purchasing and selling pre-construction properties on assignment can be a great way to make money in the real estate market, but it also comes with its own set of benefits and disadvantages.
Purchasing a property on assignment in Ontario is a legal process that involves the transfer of an existing purchase agreement for a property from one party (the "assignor") to another party (the "assignee"). The assignment process allows the assignee to step into the shoes of the assignor and assume all of the rights and obligations under the purchase agreement.
One of the main benefits of purchasing a pre-construction property on assignment is the ability to purchase the property at a lower price before it officially hits the market. This can be especially beneficial for investors looking to purchase in high-demand areas or projects where properties are likely to appreciate in value over time and the available units have been sold out by the builder.
It can be also an attractive option for the original buyer/seller on assignment because it allows them to pass the agreement of purchase and sale onto somebody else without accruing financial penalties associated with the closing costs, i.e. land transfer tax, legal and other fees, while making a profit as the property likely appreciated in value since it was purchased from the builder before the construction even began. In addition, as development projects take years to complete, sometimes the original buyer finds themselves in a liquidity problem and they want to pull out the money they have deposited with the builder over the years and invest it into other projects or pay certain loans.
However, there can be more complications to purchasing a pre-construction property on assignment. One of the main drawbacks is that it can be risky as the investor is taking on the property before it is officially theirs, and the completion of the construction is subject to delays and other issues. A long delay makes the property more vulnerable to market forces and changes in price because of the passage of time. For example, if it takes a year from the signing of the assignment agreement to the final closing date, during that period of time the real estate market may have dipped or even crashed preventing thus the buyer from obtaining sufficient financing from a bank to close the transaction as the property will be appraised at a lower value than the assignment purchase price, which usually includes a premium over the original purchase price.
Furthermore, investors must also be aware that pre-construction assignments are subject to the terms and conditions outlined in the builder's agreement of purchase and sale, including the builder's right to refuse consent to the assignment or attach a fee for the assignment. These deals are more complex than a conventional resale and involve three parties - the builder/developer, the assignor/original buyer and the assignee/ultimate purchaser.
Overall, purchasing and selling pre-construction real estate on assignment can be a great way to make money in the real estate market, but it also comes with its own set of risks and complications. It's important for investors to weigh the potential benefits and drawbacks before deciding to pursue this strategy.