BUY TIME WITH CASH - ASSIGNMENTSBy CondoWong Saturday August 10, 2019
Brand new condo unit, brand new amenities, brand new everything...
Who doesn’t like that, right?
If you buy a pre-construction condo unit, you typically have to wait for 4 years before it gets built.
A lot of people come to me and say “I want brand-new, but I don’t want to wait. So I want to buy an assignment”.
An assignment means taking over someone else’s purchase agreement with the developer, typically when the building is almost done.
Everyone sees the biggest advantage of an assignment, which is “brand new, without the wait.”
You are essentially buying time.
Most people don’t realize that you need a lot of cash to buy time.
I’ll say that one more time. You need a lot of cash to buy an assignment because you are buying time.
Let me tell you why.
There are 3 parties involved in an assignment sale.
The Assignor, that’s the original buyer of the pre-construction unit.
The Assignee, that’s the new buyer.
4 years ago, the Assignor bought a $500,000 pre-construction unit from the Developer, with a 20% deposit, that’s $100,000.
There’s no ownership transfer until the building is done and registered with the government. At this point, you are buying the rights and obligations of the Agreement of Purchase and Sale.
When you buy an assignment, it means getting the deposit and the rights and obligations transferred over to you.
Of course, there is a price to pay.
The Assignor invested for 4 years. How much does that time worth?
With the Toronto condo market, a $500,000 condo 4 years ago would be roughly $700,000 today.
Let’s just say you and the Assignor settle on an assignment price of $700,000.
That means the Assignor is making a profit of $200,000.
You see, there are 2 sums of money involved.
#1, the deposit that was paid to the developer, that’s $100,000.
#2, the profit that the Assignor is making, that’s $200,000.
Let’s talk about the deposit first.
The developer actually doesn’t care about what’s happening between the Assignor and Assignee. Once the developer executes the assignment agreement, everything gets assigned from the Assignor to the Assignee.
So, obviously, the Assignor wants the deposit money back right away.
That means, you need to have at least $100,000 cash ready before you can even consider buying the assignment.
Now, let’s talk about the $200,000 profit.
You may be able to negotiate with the Assignor to delay this payment.
However, you still need to get this amount ready in cash because you won’t be able to get that into the mortgage.
Let me explain.
In your eyes, you bought a condo at $700,000.
But the bank is only willing to see that you bought a pre-construction condo with a developer at $500,000. You put down $100,000 deposit, so the bank can only give you a maximum mortgage amount of $400,000.
So you see, you’re on your own to pay the price difference. That’s $200,000 in cash.
You may be able to get exceptions from the banks to consider a higher purchase price. But in general, banks like to be conservative and will only look at the original price.
In order to purchase a $700,000 assignment, you will need $100,000 cash to pay for the deposit and $200,000 cash to pay for the price difference. That’s $300,000 cash. That’s 43% of the price.
Normally, if you purchase a pre-construction or a resale, you put 20% down and get the rest mortgaged.
For an assignment, you will need approximately 40% down.
That’s what I mean by buying time with cash.
It’s certainly very attractive to get a brand new unit without the wait, but make sure you have 40% cash ready.
If you need advice on buying an assignment, you can schedule a call with me.
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