Nicole Lopez (00:01):
Over the past several months as the number of listings have grown in the greater Toronto area, specifically in the regional Peel, I've received a lot of queries and questions regarding purchasing pre-construction properties where the original buyer is for one reason or another, they want to sell their property for context. In 2021, when interest rates were at record lows, we saw a very hot real estate market and with many investors purchasing pre-construction properties. However, as interest rates rose and closing dates edged closer, many buyers took stock of their investment and their financial situation. For the purposes of this episode, I'll introduce you to Liam Investor. It's a story that may have similarities to a lot of other buyers out there. Please note that Liam is not the real name of the investor. Liam is a savvy real estate investor who purchased a pre-construction condo in downtown Toronto. He was excited about the potential for growth in the area and the promise of high return on his investment. The property had an amazing walk score and transportation score that was almost a hundred, and there was the promise of new tech industry investors in the area and a strong potential for rental demand. However, life through Liam, a curve ball. In this episode, we'll see how Liam was able to navigate the situation.
(02:21):
Welcome back to another episode of Real Estate with Nicole. I'm your host, Nicole Lopez, and today we're discussing a fascinating and often misunderstood topic in the real estate world assignment sales. If you've ever wondered what assignment sales are, how they work, and why they might be beneficial for both buyers and sellers, then this episode is for you. So grab a cup of your favorite beverage and settle in. Alright, let's start with the basics. What is an assignment sale? Simply put an assignment. Sale occurs when the original buyer of a pre-construction property sells their rights and obligations to a new buyer before the property is built or the property build is complete. Think of it this way, as selling your place in line for a property that hasn't been built yet. This can happen for a variety of reasons, and we'll get into those a bit later.
(03:36):
So let me break down the process for you. When you purchase a pre-construction property, you're buying the right to take possession of the property once it's completed with an assignment sale, you transfer that right and associated obligations under the existing purchase agreement to another buyer before the property is completed and title is transferred. The original buyer is often referred to as the assignor, and the new buyer is known as the assignee. So now you might be wondering why would someone want to sell their pre-construction property before it's even built? There are several reasons, and here are some examples. The assignor or the original buyer may have experienced a change in their financial situation. This could include a loss of a job relocation, thus making it very difficult for them to fulfill the purchase agreement.
(04:52):
There are cases where maybe the buyers purchase pre-construction properties as investment opportunities like Liam and decide to cash in on the appreciation before the builder completes the project. And there are cases where, or prudent, where the assignor, the original purchaser, wants to avoid penalties associated with breaking their contract with the builder. One example is losing their deposit into the preconstruction. Another would avoiding any potential legal fees that may be levied by the builder for breaching the particular contract. So let's get back to Liam, our investor. Several months after purchasing the pre-construction condo, Leah was presented with a once in a lifetime investment opportunity that aligned even more closely to his personal goals, and he found himself in the need of liquid cash much sooner than anticipated. As a result, Liam explored the option of an assignment sale.
(06:18):
So why would an assignment sale be attractive to buyers? So assignment sales can be attractive to these new buyers or assignees for reasons such as the assignee can potentially purchase a property at a lower price than the current market value, especially if the market has appreciated since the original purchase agreement was signed. And typically, that's primarily the main reason and the main reasons for my buyers contacting me to ask me about what's available from an assignment sale perspective. Another reason may be these new buyers may be able to choose properties that are near completion, reducing the waiting time compared to buying directly from the builder. So I don't know if you've experienced it or seen it, but oftentimes when new build projects, pre constructions are available, there's this lineup for everyone to get their bid in to get secure that property ASAP. And oftentimes, many people miss out on phase one or phase two, and they really want to get that property sooner than later. So they don't necessarily want to have to wait five years. Maybe there's another property or a building project close by that's similar, where an assignment sale is available and they're able to get it within the next few months. So that's another factor that influences these new buyers or assignees and makes that assignment sale so attractive.
(08:14):
So now let's take a look at some legal and financial aspects of assignment sales. It's important to note that not all pre-construction contracts allow for assignments. This is something that the assignor or the original buyer needs to check in their agreement with the developer. If the buyer permits assignment sales, there may still be conditions such as requiring the developer's consent, paying an assignment fee. Maybe the developer may or may not allow the sale to be listed on the multiple listing service system. So there could be various conditions associated or restrictions associated with what the builder may or may not permit.
(09:13):
From a financial perspective, the assignor typically wants to recover their initial deposit and some of the property's appreciation, if any. However, the assignee, the new buyer must be prepared to pay a deposit to the assignor as well as meet the developer's remaining financial obligations. So basically, as the assignee or new buyer, you are buying the contract from the assignor, and I think that's probably the best case scenario where you are buying, it's a non-stress situation and you are buying that agreement from the assigner. An alternative scenario for the assignor could be a situation where the market landscape has shifted from a hot seller's market to a buyer's market. In this scenario, the investment may not have appreciated or have seen little appreciation in the time since the property was originally purchased. There could be a situation where interest rates have risen significantly above what the assigner originally planned or was pre-qualified on.
(10:46):
And as such, they may no longer be able to qualify based on the current interest rates. And there is a risk that the assignor may not even break. Even if they sell their property, they may lose funds on their particular investment. So you as that original buyer may be tempted to break the contract. However, this decision breaking a contract will lead to bigger headaches and consequences that could follow you for a long time. So it's, in my opinion, highly not recommended for you to do that, but to look into the solutions and what you can do to fulfill or assign your contract as much as possible. So as I mentioned earlier, a breach in purchase agreement will most likely incur not only a loss of your deposit monies, but also additional fees such as legal expenses, penalties levied against you by the builder. So let's see what Liam did. As I mentioned earlier, Liam is a savvy investor. As soon as he learned of this new opportunity that was presented, he found himself in need of liquid cash much sooner than anticipated. Liam explored the option of an assignment sale and he connected with a trusted real estate agent, experienced in assignment sales, who was able to help him navigate the process.
(12:40):
So here are a couple of tips for both Assignors and assignees. For an assignor, it's crucial to work with a real estate agent who has experience with assignment sales. They can help you navigate the complexities and ensure you comply with all your contractual obligations. It's also very wise to consult with a lawyer to review the assignment agreement and ensure all legalities are covered. For assignees due diligence is key. Make sure that you thoroughly understand the original purchase agreement, the assignment terms, and any costs involved with the assignment sale. Working with a real estate lawyer and an experienced real estate agent can provide valuable insights and help you to avoid any potential pitfalls. I would strongly recommend that you listen to the three part series on pre-construction purchases. As I discuss the importance of even before you get into a pre-construction deal, really understand what's involved, the importance of the location, importance of what kind of incentives are being offered, and just understand the process in general so that if you come into the situation of wanting to assign your sale or purchasing an assignment sale, you have a good understanding of what you are getting into and also help you when you're working with your real estate agent and your real estate lawyer.
(14:40):
So with the real estate market being as dynamic as it is, assignment sales can offer both opportunities and challenges for investors. As I've mentioned in recent years in the GTA or Greater Toronto area has seen a rise in assignment sales. It's driven by the robust demand for housing and the rapid appreciation of property values. However, the caveat is market conditions can fluctuate and economic factors such as interest rates, government policies, and overall market sentiment can impact the desirability and feasibility of assignment sales. It's always prudent to stay informed and work with professionals who understand the local market dynamics. Now, back to Liam's story. Liam and his trusted team of professionals confirmed that his purchase agreement allowed for an assignment sale and listing on the NLS. As such, they advertise the condo highlighting its prime location and the attractive price compared to current market values. Soon enough, a young couple eager to secure a home in the burgeoning downtown area expressed interest.
(16:11):
And after some negotiation, the couple agreed to purchase Liam's contract. They assumed all the rights and obligations including the deposits Liam had already made. The assignment sale allowed Liam to recoup his initial investment and secure the funds he needed while the couple eagerly anticipated moving into their home once construction was complete and it was sooner than they originally anticipated. In essence, an assignment sale gave Liam liquid cash to allow him to seize a new and exciting opportunity, more aligned with his goals, and it provided the couple with an opportunity to step into the property market at a favorable price. It's a win-win scenario that underscores the flexibility and potential benefits of assignment sales in real estate. So whether you're an investor facing unexpected changes or a buyer looking for unique opportunities, assignment sales might be worth considering. This episode provided a high level overview of assignment sales, and it's essential to be well-informed and to seek professional advice from a trusted realtor and real estate lawyer who's experienced in pre-construction sales assignment sales are complex, so having this team will ensure that they can serve you effectively and efficiently in navigating the process of assignment sales.
(17:55):
Thank you for tuning into this episode of Real Estate with Nicole. I hope you found it insightful and helpful. If you have any questions or topics you'd like me to cover in future episodes, feel free to reach out. Don't forget to subscribe so you never miss an episode. Leave a review and share the podcast with anyone who could benefit from this information. Until next time, this is Nicole Lopez signing off. Know more be prepared. Be confident, stay informed, and stay positive in your real estate journey.
