Did you buy a pre-construction property in Calgary and are considering selling it on assignment?
Let me be real with you - End Users will not typically buy an assignment because they want to be able to walk through a property, envision their life there, and “kick the tires”. That leaves you with Investors who need to see an immediate “path to profit” and who will not offer you even the fair market value - expect a minimum 5-10% discount from current market prices to get an assignment sold in this market.
My advice to clients is always DO NOT SELL YOUR UNIT ON ASSIGNMENT unless you have no other option. In real estate you make money by buying a property and holding it for the long-term - your gain will nearly always be greater if you close on a property and rent it out because of the nature of assignments and the taxation involved, even if you close and sell it the very next day, you are usually better off than selling on assignment.
Here is everything you need to know so that you can make an educated decision if an assignment sale is right for you:
Pre-Construction Condo Background
Before getting into Assignments, we need to first understand the nature of pre-construction condos. Most new properties are sold as pre-construction (i.e. construction has not started yet) and buying decisions are made entirely off of marketing materials (floor plans, brochures, site maps, etc). Typically, construction cannot begin until 70%-80% of the building is sold before they can secure their construction financing and begin building.
When you buy a pre-construction condo, you technically aren’t buying real estate, you are entering into a business contract to buy the real estate once it is completed, which could be several years away. You secure the unit with a deposit and don’t put down any more money until Final Closing (this is when the building is finished and registered with the municipality, when you get legal title registered in your name, and when you get your mortgage).
NOTE: Every property bought as a real estate investment in Canada must have a minimum 20% deposit down to qualify for a mortgage at closing – this means if you provided a 10% deposit, you must provide an additional 10% deposit at closing).
What Is An Assignment?
An Assignment of an Agreement of Purchase and Sale is when the original purchaser sells their contract to another buyer before final closing. They aren’t selling the actual property since they don’t own it yet and the buyer is essentially stepping into the shoes of the original purchaser.
Assignor (Seller): The person who originally purchased the pre-construction condo and is now selling their contract to a new buyer.
Assignee (New Buyer): The new person that is buying the contract and taking over in the Seller’s place.
Considerations Before Selling On Assignment
Selling a unit on Assignment is not a simple task and has real world implications. Always get professional legal and tax advice before proceeding so that you can fully understand the implications for your unique situation.
Seller Liability
Selling a contract on assignment does not remove all responsibility or liability from the seller. If the new buyer cannot close, the original buyer is typically still required to complete the purchase unless the builder allows you to get out of your contract.
Calgary Assignment Market Not Well Developed
While assignments have been around for 20 years in markets like Toronto and Vancouver, they simply weren’t done in Calgary up until about a year ago - you bought and closed on the property. If you ask the average person or even real estate agent in Calgary what an assignment is and how it works, they simply will not know. You are battling this lack of knowledge and understanding which negatively affects the sale process and price you will get.
Not A Guaranteed Sale
Just because you list a property for sale on assignment does not guarantee that you will find a buyer willing to offer you a price that you find acceptable. If your closing is soon, always create a Plan B by speaking with a mortgage broker to determine how you can get financing to close the transaction if a buyer cannot be found - this may include “B” and “C” Lenders or even private money and while expensive, would prevent a breach of contract and default on your purchase and loss of your deposits.
Selling Price
When you sell a unit on assignment, you are typically selling the property to another investor and you will be offered less than if you were to close on the property and list it for sale in the resale market - a minimum 5-10% less than the current market value. This is because investors need to be compensated for their time, the costs involved, and risk they are taking on - otherwise why would they do it? A resale buyer is accustom to walking through a property, getting to see the finishings and the “feel” of the home and you cannot do this with an assignment.
Costs
Even though you often see “Free Assignment” being advertised, there are significant costs to selling an assignment that no one might have told you:
Developer Assignment Fees – The fee to sell your unit on assignment can sometimes be tens of thousands of dollars. Even if you have a “free assignment” clause, the developer typically includes an administration fee to approve the assignment request and process the paperwork involved.
Legal Fees - There are extra legal fees on assignments associated with drafting and reviewing the contracts by lawyers and closing the transaction.
Real Estate Commissions – If you want a Realtor to sell your assignment and find a new buyer for you, they are typically paid a commission based on the final selling price for their services. These commissions are usually higher for an assignment then they are for a resale property because of the more difficult nature of the sale.
5% GST on Profit – the Canada Revenue Agency (CRA) is cracking down on people trying to quickly flip properties for financial gain and may determine the profit on the transaction to be “business income”, subject to 5% GST which you would be responsible to pay which is based on your initial “intent of purchase”.
Profit Taxed as Income VS A Capital Gain – The CRA may also classify the profit as business income subject to full taxation instead of a capital gain (where only 50% would be taxable). Since the profit is added to your income for the year, you would pay an extra $27,765 for every $100k in profit based on the highest marginal tax rate by selling on assignment.
You make money in real estate by buying and holding for the long-term and you are usually better off to close on the property and then sell it, and even better off on closing the property and renting it out for several years because many of the above fees and taxes are reduced or go away entirely.
Here are 3 different scenarios to consider:
NOTE: The scenarios above are meant for general information only and exact amounts will depend on your unique situation.
Always seek professional legal and accounting advice before proceeding with an assignment.
Process To Assign A Unit
Assignment are complicated and legally-binding agreements – it is critical that you work with an experienced agent that can help you navigate the process and ensure appropriate clauses and protections are put in place to protect you while achieving the best possible outcome for you.
If you choose to work with me, I will help you every step of the way!
1) Understanding Your Contract & Getting Approval from the Builder
Each Developer, each project, and each contract is unique. Take the time to understand your contract and to ensure that the original Agreement of Purchase and Sale includes an Assignment clause, and the terms and conditions imposed by the Developer on assignment transactions.
Developers will often include restrictions that prevent assignment sales until a certain percent of the building has been sold, and specific time limits. Most developers will not allow an assignment very close to the closing date because they want to ensure that final closings go smoothly.
Most developers will not allow assignments to be posted on MLS, websites or any public forum - this severely limits your potential audience.
Getting the Developer’s approval to assign a contract is always required. The request must be sent to the Developer in writing, and they will provide a formal approval once all of their conditions are met – this often includes:
Builder’s Assignment Form: Developers typically have an assignment form that must be completed.
Paying the Assignment Fee: the fee to assign the unit including legal and administration fees is typically around $1,000 but I have seen these costs be $10,000+ or even a percentage of the purchase price.
Identification: the New Buyer must provided copies of identification, mailing information and contact details as required by the Developer
Mortgage Pre-Approval: the New Buyer must provide proof to the Developer that they have qualified for financing with a mortgage pre-approval from a major financial institution. The mortgage amount should be based on the new purchase price, not the original contract.
Not all contracts include the ability to assign the property (this is common for houses). However, developers will often allow a property to be assigned if a fee is paid. It is common that Developers will now allow incentives like cash back at closing, rental guarantees, free condo fees, etc. to be carried forward to the new buyer as part of the approval process, so ensure you get clarification before the property is listed.
2) List the Assignment
When you are ready to actually list the assignment for sale, forms will need to be signed including a Listing Agreement and Working With a Realtor form. The listing includes all of the information about the property and the incentives that are transferrable to the new buyer so that potential buyers can property assess the opportunity.
To determine the Listing Price for a property, you normally look at recently sold comparables in the area. With assignments, there is no database to look-up against and it takes extra work to determine the fair market value which typically falls somewhere between the recently sold existing properties and the new pre-construction project launches in the area – it can be more art than science.
3) Find a New Buyer
Finding a buyer can get tricky since developers do not allow assignments to be advertised on realtor.ca/MLS (Multiple Listing Service), realtor websites, or even realtor forums. This is why selling a unit on assignment can be particularly difficult and you need an expert to ensure your assignment is properly marketed so that you can get the best possible price.
One of the benefits of working with me is that I have the largest Calgary assignment database in Canada and a broad marketing network to achieve the highest possible price for your assignment.
4) Negotiate the Contract & Complete Paperwork
Assignment sales involve a lot of paperwork, and it is critical that the Assignment Agreement protects the interest of all parties involved. The diligence of an experienced agent and lawyer are crucial here due to the important points to be considered.
Offers will be submitted to you using an assignment agreement, including:
Contract Details (Selling Price, Closing Date of Assignment, Payments, Incentives, etc.)
Terms (Handling of Occupancy Fees, Closing Costs, Interest on Deposits, etc.)
Conditions (Review of Original APS, Developer’s Approval, Lawyer Review, Financing, etc.)
5) Accepted Deal, Payment & Closing
After the Assignment Agreement is completed and signed by both parties, it should be sent to the lawyers for both the buyer and seller to review. Contract terms may need to be added, removed, or renegotiated.
Once everyone is in agreement, then the request for approval of the assignment should be made to the Developer. Supporting information, completion of the Developer’s Form, and required fees will need to be provided before the builder will provide their approval.
Once the Developer Approval is granted and all conditions of the contract are met, then the assignment sale is complete or “closed” and the New Buyer takes over in the shoes of the Seller. From this point the Developer typically only communicates with the New Buyers for updates, finishing selections, property closing, etc.)
The New Buyer will provide an initial deposit for the assignment within 24 hours of an accepted agreement which is held by the lawyers until the assignment deal closes. At closing of the assignment, the remaining payments will be provided to the lawyers and then ultimately to the Seller. The New Buyer will always provide you with the deposits you put down at closing of the assignment, but the Profits are paid out in one of the following scenarios and subject to negotiation:
1) All Profit Upfront: Once the assignment deal closes, the Seller will receive the remaining deposits and all of the profit.
2) Profit Paid Later: Once the assignment deal closes, the Seller will receive the remaining deposits but will not receive the profit until a later date (often at closing of the original property)
Here is an Example:
John bought a pre-construction condo from a Developer 2 years ago for $400,000 with a 10% Deposit ($40,000). He just had a baby and has decided to sell the property on assignment because he needs to buy a bigger house. By working with us, he was able to find a New Buyer willing to pay $500,000 for the property. Here are the two scenarios which show what the payment would look like if all of the profit is paid upfront or paid out after final closing.
Tax Implications of Selling On Assignment
NOTE: If you are considering selling your unit on assignment, get professional advice from a tax accountant. The below information is meant only as general information and not tax advice as each person’s situation is unique.
Any gain that you make by selling a unit on assignment is subject to income tax and may have GST/HST implications too. Here is the Canada Revenue Agency (CRA)’s publications on:
Assignment of a Purchase and Sale Agreement for a New House or Condominium Unit:
Residential Property Flipping Rule
https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/residential-property-flipping-rule.html
Inclusion Rate
The tax treatment of an investment depends on your intention at the time of purchase and the length of time the property is held (after closing). If you intended to resell the property for a quick profit, the gain will be treated as business income with a 100% inclusion rate. If your intention was to purchase a long-term investment, the gain from an assignment is a capital gain which a 50% inclusion rate and a significant tax benefit. If the property was held for less than 365 days, then gains will be automatically considered business income unless there is an exception for a “life event” including: growth of a household, separation, disability or illness, employment change, insolvency, or an involuntary disposition.
The CRA is cracking down on people who flip properties on assignment so proceed with caution and be prepared to support your claim with documentation and evidence if you plan on claiming it as a long-term investment subject to capital gains.
Also be very careful if you were planning to live in the property as a principal residence because if you sell the unit on assignment, then the property was never inhabited as a principal residence and therefore cannot qualify for a principal residence exemption!
GST/HST Payable
As of May 7, 2022 all assignment sales are subject to GST/HST and everyone must collect and GST/HST on their assignment profit and remit it to the CRA. Since assignment sales typically have GST/HST included in the purchase price, the Seller would be responsible for paying this. Paying GST/HST on deposits provided to the builder no longer applies.
DISCLAIMER: I am not an accountant so if you are considering selling your unit on assignment, get professional tax advice to determine the potential implications for your unique situation and for the proper classification of your assignment sale.
Final Considerations
Selling an assignment is incredibly difficult and you are going to give up significant value if you can even find a buyer. Contact me today and we can explore the financing options available so that you can close on the unit because everyone can get financing if there is enough time.