Assignment of Contract in Real Estate
There have been a number of pre-sale condos popping up in the Lougheed area. With the new City of Lougheed development, as well as many others like the Marquee, Simon, and more, we’ve had a number of people asking us about assignment of contracts, and how it works. It is important to note that while the majority of assignments occur in pre-sale properties, they can also occur in resale properties if the buyer is unable to complete for whatever reason. To make this as easy as possible, we’ve written this blog in a question answer format for understanding an assignment of contract in real estate.
What is an assignment?
- An assignment of contract in real estate is a transaction of a home in which the buyer of the property “assigns” or transfers their rights and obligations of the Agreement of Purchase and Sale previously agreed to another buyer before the original buyer closes on the property. In this case, because completion has not occurred, they are not the legal owner for the property yet, thus they require consent from either the seller or the developer(often times the developer). This can occur in both resale and presale homes; however, assignments are most commonly found in presales where there is a longer closing, often 5 years away.
When can I assign a home? Are there any restrictions?
- You will have to refer back to the original contract of purchase and sale to determine whether or not you are able to assign the home. Some terms you may encounter, specifically for presales, are:
- The developer or seller’s approval
- Resale profits must be split with the seller unless otherwise agreed to in the contract
- Marketing can be very tricky. MLS (multiple listing service) restrictions for online marketing may be prohibited, many developers do not allow the advertising and sale of assignments until the building is sold out.
- A time frame when you cannot assign the contract
- An assignment fee to be paid to the developer in the presale scenario, usually 1% to 2% of the sale price.
Why do assignments occur?
- Assignments often occur when a presale has appreciated significantly in value prior to completion. The current buyer would like to take the appreciation while it’s up, and assign it to another buyer.
- It used to be the case where buyers could “shadow flip” in residential sales, and did not require the sellers approval in order to assign the property prior to completion. This was a huge issue in residential real estate sales in 2015 particularly, and was subject to scrutiny by the public and news broadcasters. The Real Estate Council of BC has since required that an assignment needs to be approved by the seller and profit be split equally between the current buyer and the seller once assigned. The contract of purchase and sale for resale residential properties has also been updated to avoid “shadow flipping” and assignments without the sellers knowledge. The restriction of assigning properties secretly only applies to resale properties – this restriction does not apply to the presale market, where assignments are actually most common.
- Assignments now occur in residential resale real estate moreso in some kind of emergency from the buyer, where they are unable to complete for whatever reason like a loss of employment, death, or critical illness. Assignment of contract for profit is less common now than it used to be.
What are the advantages of an assignment for the current buyer assigning the contract?
- The assignor (current buyer) can most likely avoid the builder’s closing costs and land transfer tax associated with the subject property;
- The assignor may not have to pay the additional taxes (i.e GST) rebate back to the Builder if they intended to occupy the property.
- The seller/assignor avoids the carrying costs (mortgage, maintenance fees, taxes, etc.) for the time between listing the property and selling a property.
What are the advantages of an assignment for the new buyer?
- The assignee (new buyer) may receive a better price than other current properties on the market. This will also depend on the current buyer’s motivation to sell;
- The assignee will receive a brand-new home and may also have the opportunity to make finishing selections, such as the kitchen or bathroom colour scheme, depending on when the assignment takes place;
- The assignee may be able to avoid Land Transfer Tax if the original Agreement of Purchase and Sale is under $750,000;
- The assignee may be able to take advantage of the deposits of the original buyer and be able to put less of a down payment on a property than he would otherwise have been able to.
Fees associated with an assignment?
If this is a resale home that you are assigning, you will most likely have to split the profits of the assignment with the seller unless otherwise agreed to. Typically there are extra legal fees and there is an assignment fee to the builder if it is a presale assignment. As previously mentioned, most assignments have the new buyer taking full responsibility for the contract; however, it may be the case where the new buyer and the original buyer have agreed to split some adjustment costs.
Are there tax implications on assignments?
- Any profit from the assignment of a property that goes to the current buyer, after having been split out to the seller if previously agreed upon, is subject to tax as part of your income. With regards to property transfer tax, and any goods and services tax on the property, this is typically paid by the new buyer as they are responsible for taking over the contract of purchase and sale in its entirety, unless otherwise agreed upon. If you are unsure about the tax implications, it is always best to speak to your realtor as well as an accountant to determine an estimate on what you may incur.
Are there risks involved?
It is very important to make sure that the new buyer is willing and able to take on the assignment as well as all terms and conditions of the contract of purchase and sale. If the assignee, the new buyer, does not follow through with the completion on the sale, the responsibility to close usually defaults back to the original buyer, the assignor.
If you are thinking about assigning a property, make sure to talk to a realtor first to determine whether or not you will make a profit. They’ll need to take a look at your original contract, and also assess the current market to determine an estimate of the market value of the subject property. There is no guarantee that there will be profit associated, in fact there may be a loss in a declining market. Your realtor will have to factor in all costs associated, such as fees and commissions, in order for you to make the best decision. If you’re thinking about assigning your contract, give us a call today to see what’s right for you: 604-765-0376.
OTHER POSTS YOU MIGHT BE INTERESTED IN…