Clients often interested in buying condos will ask me what is involved in buying an assignment agreement. This is becoming a more popular part of the Toronto condo market again. There are many things to think about when buyer a Condo Assignment agreement in the Toronto Real Estate Market and it is not to be taken on lightly. You do need professional advice.
An assignment is where a buyer has purchased a condo from a builder usually 2-3 years prior to it being finished and ready to move in. The owner of the new unit wants to sell the paper on the unit it or Flip it prior to closing to try and save on occupancy fees, land transfer and associated costs that may be in the agreement and have to be paid on closing. So assignment agreements are typically sold within a few months prior to occupancy.
When you purchase an assignment you are not buying the unit itself you are purchasing the actual contract or the rights in the contract and you are subject to all the terms of the contract .
People sell their contracts for several reasons. Some were purely speculating and just looking to make a profit, others have had a life change and the unit no longer fits their plans. For instance in a 2-3 year time frame it is quite possible that a young man may buy his first one bedroom unit, meantime he meets a young lady, gets married and has a child and needs a larger space. Someone may be transferred from Toronto to Calgary or even leave the country and go overseas.
When making an offer for the contract one should be sure to ask for a copy of the original agreement and make the offer conditional for a few days upon a solicitor reviewing both the agreement and the original contract.
There are some risks in purchasing an assignment.
The risks for the assignor- the seller
- The contract may not be assignable
- You may have to pay the builder for the consent
- The original seller (builder)may become un-co-operative
- The assignee (buyer) may not close.
The risks for the assignee – the buyer
The contract may not be assignable
- You are responsible to make sure the builder gets paid
- Is the agreement in good standing. Builders require a series of deposits. Have these deposits been paid on time. If not there will be interest due on them and you could end up paying them.
You can see why it would be important to have a realtor who knows how to work with assignments and a lawyer who close these type of contracts on a regular basis and is used to reading builders contracts.
To put it simply you need to submit an offer that forces the seller to supply a copy of the original agreement, proof that they have paid their deposits and that they are in good standing with the original builder. It will also need to reflect proof that the seller has the right to assign his contract and a good reading of that original purchase offer will also inform you as to what the extra contingency costs were.
Keep in mind here you are effectively “stepping into the shoes” of the original buyer. The assignee “buyer” assumes all “obligations” under the original agreement, plus all closing adjustments. This could potentially add up to an extra $10,000 to your contract price. IT may be as small as $3500.00 for a locker or as high as $30,000 for parking. But you will need to determine this number so that you can be sure to have cash available at close.
You must determine if you are eligible for the GST/HST rebate as the builder is counting on re-cooping this money. This means you will need to move into the unit or have a close family member move into the unit.
If the builder suspects you are not intending to move in he will bill you for the GST/HST. HST on a $400,000 on a new condo can be as high as $24,000. You would then need to apply to the government for a refund, but would need to have this money in hand for closing. If you don’t occupy the unit during the occupancy period then this is a good indication to a builder that you don’t plan to occupy the unit.
You will also need to check that the Tarion Warranty will transfer to you on closing or whether the seller will need to supply you with a new one.
Keep in mind that if a builder is still holding a good 15-20% in inventory he may not want other units on the market yet.
The numbers you need to consider here are
- Price to pay to the assignor
- The original purchase price – he is looking to make a profit on that.
- He will want to be paid back the deposits paid to the builder
- Any interest that may be paid on deposits
- The owner will want to re-coop his deposits from you as soon as the builder agrees to the assignment fee.
- The consent fee
- The profit is paid to the original owner at closing.
Sellers tend to sell their contracts in one of two ways. Some sell at a price that includes both profit and fees others sell at a price that is a % of the original purchase price plus deposits and fees.
It is important to know which way the transaction is being handled.
MAKING AN OFFER
- Make sure that your purchase price includes the HST
- As a buyer you should attend the PDI with the builder for the Tarion Warranty. The original owner may not take your interests to heart as he may have lost interest or no longer even be in town. Only issues that are brought up at the PDI will be accounted for on your behalf.
- Have a clause holding back funds for unassessed taxes if you are closing close to the end of occupancy. If your realtor and lawyer are not highly experienced in Assignment Agreements this could go forgotten and you could find yourself owing as much as 18 months in back taxes if closing is for some reason extensively delayed. Eighteen months after closing the City of Toronto tends to do a retroactive tax assessment back to the day of occupancy.
- As the buyer you will be responsible for paying the occupancy fees during interim occupancy.
- You or a family member will need to occupy the unit to avoid paying HST directly to the builder.
- The seller will want you to indemnify him from losses or costs if you are the buyer and you should fail
to close the transaction with the builder.
- Remember to add in a clause to reduce the purchase price on closing to remedy any breaches of contract by the seller to the builder such as, NSF charges, unpaid deposits, unpaid occupancy fees prior to you purchasing his contract.
As you can see there are many things to think about in this transaction. Make sure you get experienced help on this matter.
