Understanding Assignment Sales in Real Estate: How They Work and Why They’re Everywhere

What exactly are assignment sales? How do they work, and why are they suddenly so common in Ontario’s real estate market? In this post, we dive into why sellers and buyers engage in assignment sales and explore the legalities involved in executing one successfully.

What is an Assignment Sale?

An assignment sale occurs when the original buyer (the assignor) allows another buyer (the assignee) to take over their Agreement of Purchase and Sale before the original buyer takes possession of the property. The new buyer assumes all the risks and benefits associated with the deal. Essentially, the assignment clause allows the original buyer to sell the property before taking possession, with the new buyer stepping in to complete the transaction with the seller.

Assignment sales can occur with existing properties, but they are most common in Ontario for pre-construction condo deals.

Why Are Assignment Sales So Common?

You might have noticed a surge in assignment sales lately. In fact, social media platforms like Facebook now have groups dedicated to them, with daily posts advertising opportunities. So, why the sudden boom in assignment sales?

1. Rising Interest Rates: Higher interest rates mean that some buyers can no longer qualify for the mortgage amount they initially planned for.

2. Increased Carrying Costs: For those who purchased as an investment, carrying costs may have escalated beyond affordability, making it difficult to manage alongside their primary residence.

3. Ontario’s Speculation Tax: The province now charges income tax on profits from homes sold within the first year, which impacts investors looking to flip properties quickly.

What Are the Benefits and Pitfalls of Assignment Sales?

Assignment sales can offer advantages but also present challenges, especially for the buyer. One major downside is the lack of a tangible asset—many real estate boards in Canada and some builders don’t allow assignment sales to be listed publically, leaving the original buyer or their real estate agent left to creative methods of promoting the sale.

As the new buyer, you’ll need to reimburse the original buyer for any deposit they’ve made and sometimes for upgrades. Additionally, you’ll have to pay the difference between the original purchase price and the assignment price out of pocket, as lenders typically won’t finance this amount. For example, if the original buyer purchased the property for $700,000 and you’re buying it for $800,000, you may need to pay the $100,000 difference upfront. This can result in significant out-of-pocket expenses.

Navigating the Legal Considerations of an Assignment Sale

It’s crucial to thoroughly review the purchase contract when dealing with an assignment sale, as terms can vary widely. In many cases, builders have the upper hand, and some may not permit assignment sales or charge substantial fees for doing so. You could also cover additional costs, such as the builder’s legal fees, to finalize the transaction.

When buying an assignment sale, remember that you inherit the existing contract. The terms are not negotiable, so it’s vital to have your lawyer review the agreement to understand any potential risks or additional costs.

Contracts may also be influenced by market conditions. Currently, due to market fluctuations, contracts are a bit more flexible, but this could change if the market experiences a dramatic shift.

Assignment Sales: A Good Investment Opportunity?

Despite the challenges, assignment sales can present great opportunities, especially for investors. If you’re looking for an investment property, there are some attractive deals out there. With higher interest rates, some sellers have no choice but to offload their properties, meaning you might find a pre-construction condo at a reduced price.

If you have capital available and are considering investing in real estate, now may be an excellent time to explore assignment sales. Opportunities are available, especially while rates remain high. However, remember that the real estate market can change quickly—if you find a deal that makes sense, be prepared to act fast.