Assignment sales have become a popular topic in the real estate market, especially in Ontario, where housing demand continues to rise. As of 2024, the rules and procedures surrounding assignment sales have evolved, making it essential for buyers, sellers, and investors to understand how they work. In this blog post, we'll break down the concept of assignment sales, the key steps involved, and the important legal and financial considerations.

What is an Assignment Sale?

An assignment sale occurs when the original buyer of a property (the assignor) transfers their rights and obligations under the purchase agreement to a new buyer (the assignee) before the property is completed and ownership is transferred. Since the assignor has not yet closed on the property, this is not a sale of the property itself but rather a transfer of the parties' interest in the purchase agreement. Think of it as selling the "paper" to the deal.

Why Do Assignment Sales Happen?

Assignment sales can occur for several reasons:

Investment Opportunity: The assignor may see an opportunity to profit from an increase in property value without having to close on the property.
Change in Circumstances: The assignor's personal or financial situation may have changed, preventing them from completing the purchase.
Market Conditions: Fluctuations in the real estate market may make it advantageous to sell the purchase agreement rather than the property itself.

Assignment sales tend to be most common in new construction properties, especially during times when units were purchased at lower interest rates, such as in 2020-2021.

Key Steps in an Assignment Sale

1. Reviewing the Original Purchase Agreement

Before proceeding with an assignment sale, the assignor must review the original purchase agreement to ensure that assignment is allowed. Some agreements may have restrictions or require the developer's consent. Remember that huge legal document you signed when you made an offer to buy a pre-construction condo? It’s time to take it out and actually read it.

2. Finding an Assignee

The assignor must find a buyer interested in taking over the purchase agreement. This involves marketing the assignment sale, often with the help of a real estate agent who specializes in assignments.

3. Negotiating Terms

Because the assignee is taking over the original purchaser’s contract, they can’t renegotiate the price or terms of the contract with the builder – they are simply taking over the contract as it already exists, and as you negotiated it.

In most cases, the assignee will mirror the deposit that you made to the builder. So if you made a 20% deposit, you can expect the new purchaser to do the same.

Most sellers of assignments are looking to make a profit, and part of an assignment sale negotiation is agreeing on price. Your real estate agent can guide you on price, which will determine your profit (or loss).

4. Obtaining Developer Consent

Most developers require their consent for an assignment sale. This involves submitting an application and possibly paying an assignment fee to the developer. The developer will review the application and the financial background of the assignee. Your Agreement of Purchase & Sale stipulated your rights to assign the contract. While most builders allow assignments, there is usually an assignment fee that must be paid to the builder. There may be additional requirements as well, the most common being that the builder has to approve the assignment.

5. Finalizing the Assignment Agreement

Once the developer consents, an assignment agreement is drafted and signed by both parties. This agreement outlines the terms of the assignment and the responsibilities of each party.

6. Closing the Assignment Sale

On the closing date, the assignee will pay the assignor any agreed-upon amounts. The assignee then assumes all rights and obligations under the original purchase agreement and will complete the purchase when the property is ready.

Legal and Financial Considerations

Legal Considerations

Contractual Obligations: Both parties must adhere to the terms of the original purchase agreement and the assignment agreement.
Developer Consent: Without the developer's consent, the assignment sale cannot proceed.
Closing Costs: Both the assignor and assignee should be aware of any additional closing costs or fees associated with the assignment.

Financial Considerations

Taxes: Assignment sales may be subject to HST and capital gains tax. The assignor should consult with a tax professional to understand their tax obligations.
Financing: The assignee must secure financing for the property. It's crucial to ensure that the lender is aware of and approves the assignment.
Deposit Transfers: The assignee typically reimburses the assignor for any deposits paid to the developer, which may require careful financial planning.

Benefits and Risks

Benefits

For Assignors: Assignment sales provide a way to realize profits before closing and mitigate risks associated with market fluctuations.
For Assignees: Assignees can purchase a property in a sought-after development that may no longer be available for direct purchase from the developer.

Risks

Market Risk: Changes in market conditions could affect the value of the property, impacting potential profits or losses.
Legal and Financial Risks: Misunderstanding contractual obligations or failing to obtain necessary consents can lead to legal disputes and financial losses.

Assignment sales in Ontario offer a flexible option for buyers and sellers in the real estate market. However, they come with their own set of complexities and risks. By understanding the process and seeking professional advice, both assignors and assignees can navigate assignment sales successfully. Whether you are considering selling or buying an assignment, staying informed and prepared is key to making the most of this unique real estate transaction.