Watch Out For 3 Traps When You Buy An Assignment Unit In The Current Toronto Real Estate Market
Last week, the Bank of Canada raised the interest rate again by 25 basis points, bringing the overnight rate to 4.5%.
Typical mortgage rates now sit at around 5 to 6%.
And that is causing one type of sales to become popular in the Toronto real estate market.
People with upcoming pre-construction closings may have problems getting a mortgage at the high rates.
They want to find a buyer who is willing to take over the purchase agreement that they signed with the developer maybe a few years ago.
So they want to “assign” the unit to a new buyer.
If you don’t know how an assignment sale works, you can watch the video at the link below.
Now, some people see this as an opportunity to go back in time and potentially purchase a unit at the original price from a few years ago because the seller is now having a crisis.
That’s why assignment sales have become popular.
Before you get too excited about striking some deals, make sure you are aware of these 3 assignment traps.
#1 Developer Incentives
When people purchase pre-construction units at the opening phase, it is quite common that they would receive some incentives from the developer.
For example, development charges capped at $15,000. That sets the maximum amount they would have to pay for development charges at closing time.
When you buy an assignment, you are taking over someone else’s contract with the developer, so it is natural to think that includes all the incentives as well.
It is very easy to fall into this trap and it could be very painful.
You have to make sure you check the developer’s consent agreement very carefully.
It could include a clause like this one.
The parties acknowledge and agree that all amendments that provide monetary credits, caps and other financial incentives provided by the Vendor to the Assignor as an inducement when the Purchase Agreement was originally executed or thereafter are non-transferrable and are not being assigned. The Assignee will not receive the benefit of any of these credits, caps and/or financial incentives.
Without the $15,000 development charge cap, you could potentially be paying $40,000 for development charges.
You see, this is a big one to watch out for.
#2 Non-Resident Assignor
You might not have thought that the status of the assignor would matter to you.
But there are actually tax implications that you need to be aware of, if the assignor is a Canadian non-resident or a non-Canadian.
When an assignor sells a unit to you, he or she is subject to pay income taxes and HST.
A Canadian non-resident may not be filing annual tax returns.
And a non-Canadian is probably not filing anything at all.
Let’s suppose they run away from their tax obligations after they sold the unit to you.
Who does the government go after for the missing tax money?
You would have to pay the outstanding amount for the assignor.
So is there anything you can do to avoid falling into this trap?
Have your lawyer confirm whether the assignor is a Canadian resident.
If not, the assignor's lawyer must withhold enough money to cover potential tax obligations.
A tax clearance certificate from the CRA must be received before releasing any remaining balance to the assignor.
#3 Time to Completion
If you are buying an assignment that is still 12 months or more away from completion, then you have to be very careful.
There are actually 2 potential traps that you could fall into because of this timing gap.
Number one, with the current high interest rates, inexperienced or non-reputable developers could run into financial problems as well.
They might have no choice but to cancel the project even though it is already under construction.
You would still get your deposit money back in a few months’ time.
But who would want to buy an assignment just to see it cancelled?
So you have to make sure you choose a reputable developer even if you are just buying an assignment.
The second trap comes from greedy sellers.
They want to assign the unit to you now because they are afraid of the high mortgage rates.
But the Bank of Canada has already signalled a pause on rate hikes.
Let’s suppose, in 12 months’ time, rates start to come down and the real estate market becomes very active again.
The sellers might not want to sell the unit to you anymore, they would rather keep it themselves.
They could use “failure to get the developer’s consent to the assignment” as an excuse to get out of the deal.
And it would be very difficult to prove it otherwise because developers typically don’t give consent until they are just a couple months away from completion.
Besides, a potential assignee is really nobody in the developer’s eyes because they can only see the assignor as the official buyer on the purchase agreement.
So be extra careful if you are buying an assignment more than 12 months away from completion.
Assignments are good opportunities in this market and people are definitely taking advantage of them, you just have to make sure you don’t fall into the traps.
If you are looking for good assignments, you can schedule a call with me at the link below.
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