What is an Assignment Sale?
Table of Contents
- Introduction
- What are Assignment Sales?
- How Do Assignment Sales Work?
- Pros and Cons of Assignment Sales
- Conclusion
- FAQ
Introduction
Imagine you wanted to buy a home, but it hadn’t been built yet. You sign all the necessary paperwork , and enter into an agreement with the builder that you will buy the home once it has been fully constructed, for a particular price. In the meantime, however, maybe you changed your mind. You may not want to buy this specific home anymore because of the location, or the layout, or the features it offers. Lucky for you, there are other homebuyers dying to pick up this very same home, especially at the price you agreed to buy it for. So, you make a deal with another buyer that they get to have “your spot,” and transfer the property purchase contract to them. In exchange for giving up “your spot,” you also get paid. This is what is known as an assignment sale.
What are Assignment Sales?
An assignment sale represents the transfer of the rights and obligations of a property purchase contract from the original buyer (assignor) to a new buyer (assignee) before the completion of the property's construction, or before the final closing date. In simpler terms, it's when the purchaser of a property sells their rights to purchase that property to someone else before they take possession. By selling their rights (or, “their spot”), the assignor usually will receive payment from the assignee.
How Do Assignment Sales Work?
In a typical assignment sale scenario, the assignor of a pre-construction property will choose to sell their interest in the property before the closing date. They usually do this when they believe they can make a profit, or when they're unable to complete the purchase themselves. The assignor then finds a new buyer (assignee) who agrees to take over the purchase contract.
The assignee will pay the same price for the home that the assignor would have purchased, but they also have to pay a fee to the assignor, in exchange for giving up their rights to purchase the home. Once this fee has been paid out, the assignee assumes the original terms of the purchase contract with the developer, and the assignor is relieved of their duty to purchase the property themselves.
Pros and Cons of Assignment Sales
Pros:
- Profit Potential: As the assignor, you can make a profit by selling your claim to the home, especially if the market value of the property has increased since you first entered into your contract
- Flexible Exit Strategy: Assignment sales provide flexibility for buyers who may have changed their plans or financial circumstances since signing the purchase contract. It allows them to exit the deal without defaulting on the contract.
- Access to Pre-Construction Properties: For the assignee, purchasing through an assignment sale can offer access to desirable pre-construction properties that may be sold out or have limited availability in the primary market.
Cons:
- Developer Approval: Assignment sales are subject to the developer's approval, and not all developers permit them. Even if allowed, developers may charge administrative fees or impose conditions on the assignment process.
- Market Risk: Both assignors and assignees are exposed to market risks and fluctuations. If the market value of the property decreases between the original purchase and the assignment sale, the assignor may incur a loss, while the assignee may pay more than is necessary for the property.
- Complexity and Legal Risks: Assignment sales involve additional legal and administrative processes compared to traditional real estate transactions , increasing the risk of misunderstandings, disputes, or legal complications.
Conclusion
While assignment sales may not be for everyone, they can provide a much needed solution to buyers looking to find a pre-construction home in a hot real estate market, and sellers looking to gain more flexibility from the sale. It is important to remember, however, that while assignment sales can generate profit and increase flexibility for assignors, they are almost entirely at the developer’s discretion. As such, careful planning and research should go into any potential home sale. Whether you're considering selling your rights to a property or looking to purchase through an assignment sale, understanding the process and its implications is essential for making informed decisions in the real estate market. To learn more about your options as a buyer, you may want to consult a Clover Mortgage broker. We can provide tailored advice to help you meet your housing goals. Contact us to schedule your free consultation today!
FAQ
Is it Good to Buy an Assignment Sale?
For many buyers, purchasing through an assignment sale can serve as a unique opportunity to access desirable properties that may otherwise be unavailable in the primary market. Buying an assignment sale may also provide profit potential if the property’s market value has increased since the original purchase. But it's just as important to consider the risks involved in an assignment sale. These can be mitigated by due diligence on the part of buyers, a review of assignment agreement terms, and assessment of market trends. It is euqlly important to consider the risks associated with developer approval, fluctuations in the market, and potential legal issues. Assignment sales certainly provide flexibility and generate profits, but they also come with inherent uncertainties that are not suited to every buyer's situation. Consulting with real estate professionals and conducting careful analysis can help buyers make informed decisions about whether buying an assignment sale aligns with their objectives and risk tolerance.
Who Pays HST on Assignment Sales?
In Canada, the payment of Harmonized Sales Tax (HST) on assignment sales depends on various factors, including the type of property, the status of the buyer, and the specific circumstances of the transaction. Generally, if the original purchaser (assignor) is considered a builder or engaged in the business of selling real estate, they may be required to charge HST on the assignment sale price.
If the original purchaser is not a builder or not involved in the business of selling real estate, HST may not apply to the assignment sale. However, the assignee (new buyer) may still be responsible for paying HST on the purchase price upon completion of the transaction, depending on the type of property and whether the purchase is for personal use or investment purposes.
How Do You Price an Assignment Sale?
There are many ways to price an assignment sale: from conducting a market analysis to going off of the terms in the original purchase contract. One common approach is assessing the difference between the original purchase price and the current market value of comparable properties in that area. The price will also depend on how far the construction has progressed, when completion is likely to take place, and what kind of upgrades the developer is willing to include (in addition to other incentives that might be offered). Sellers may also base their decisions on the current market demand for similar properties, current interest rates, and the general economic climate. It then becomes imperative for sellers to do careful research and, if need be, seek professional advice from real estate agents in arriving at a price that not only represents the true value of their property, balancing the market dynamics, but also best suits their personal financial goals and timelines. On the other hand, buyers have to exercise due diligence on whether the price set is compatible with their budget and investment agenda and the potential value of the property.
