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Demystifying Assignment Sales

March 19, 2024 | Buying

Demystifying Assignment Sales in Real Estate

In the dynamic world of real estate, various terms and concepts can be overwhelming for both seasoned investors and first-time homebuyers alike. One such concept is that of “assignment sales.”

So, what exactly is an assignment sale, and how does it work?

An assignment sale occurs when a buyer of a pre-construction property decides to sell their purchase rights to another party before the property is completed. In simpler terms, the original buyer assigns their agreement with the developer to a new buyer, who then assumes the rights and obligations of the initial contract.

Assignment sales have popped up on the marketplace more frequently in the last year or so due to economic changes around mortgage rates.  Although there are other reasons, more than a few fingers point at the buyers lack of ability to close on deals.  They were often purchased in a very different economic climate, and rising borrowing costs are the main culprit as to why.

Although the situation is dire for original buyers, as they’ve potentially become distressed sellers of assignments, it presents a unique opportunity for new buyers of those assignments to buy at a lower price and thus make money on the buy.  Essentially when the market does go back up (which it always seems to do!) the new buyers will stand to gain the profit.

To wrap your head around the concept of assignment sales a little bit better, we’ve outlined a path of point when purchasing one including key notes to consider along the way!

Key Components of Assignment Sales:

  1. Pre-Construction Purchase:

    • The process typically begins with a buyer signing a purchase agreement with a developer for a property that is yet to be constructed.
    • Typical new home pre-construction sales begin 1-2 years before the project is built.
    • Typical new condominium pre-construction sales begin 2-5 years before the project is built.
  2. Assignor (Original Buyer):

    • The initial buyer, known as the assignor, decides to sell their interest in the property before the closing date.
  3. Assignee (New Buyer):

    • The assignee is the new buyer who purchases the rights to the property from the original buyer.
  4. Developer’s Consent:

    • In most cases, developers have specific terms regarding assignment sales outlined in the original purchase agreement. The developer’s consent is often required for the assignment to proceed.
  5. Assignment Fee:

    • The assignor may charge an assignment fee to the assignee, representing the cost of transferring the purchase rights. This fee is negotiable between the parties involved.

Benefits of Assignment Sales:

  1. Profit Potential:

    • In sellers markets, assignors may choose to sell their purchase rights at a higher price than their original purchase price, allowing them to make a profit without ever taking possession of the property.
    • That being said, if the market has changed to a buyers market since the assignor purchased the pre-con project, it may be the buyer who benefits from purchasing an assignment at a lower price than the project was originally worth!
    • In today’s market place, with the cooling of the pre-con market, buyers of assignments have a unique upper hand to make money on the buy.
  2. Flexibility:

    • Assignors benefit from flexibility, as they can exit the agreement without having to close on the property or secure mortgage financing.
  3. Access to Desirable Properties:

    • Assignees, on the other hand, gain access to sought-after properties that might be sold out in the primary market.

Considerations for Buyers and Sellers:

  1. Developer Approval:

    • Both parties involved in the assignment sale should be aware of and adhere to any conditions set by the developer for the assignment to take place.
    • Developers will often use “free assignment” as a promotion when selling a pre-construction project for this reason. Also to entice buyers to buy without the fear of hassle down the road should buyers choose to assign their purchase.
  2. Legal Implications:

    • It is crucial for both the assignor and assignee to seek legal advice to understand the legal implications of the assignment sale.  There is plenty of fine print to read!
  3. Financial Considerations

    • Assignments typically require a heftier down payment than a regular purchase of a home.  This is due to the fact the assignee will have to pay the (up to) 20% deposits to the builder along with the difference between the original purchase price and the new assignment price, if the new price is higher – upfront!
    • The big banks typically do not finance assignment sale deposits in the way of a mortgage – so it would be up to the buyer to come up with the capital to pay the assignor.
    • A mortgage would likely only be introduced when the pre-construction project is complete and the banks have an asset to attach the mortgage to.
    • When in doubt, seek the guidance of a mortgage professional!

Assignment sales provide a unique avenue to buy real estate, offering flexibility and potential profits for both sellers and buyers involved in pre-construction purchases.

However, navigating the intricacies of assignment sales requires a clear understanding of the terms, developer requirements, and potential risks. As with any real estate transaction, seeking professional advice can help ensure a smooth and successful process for everyone involved.

See a unique opportunity in assignments you’d like to explore? Reach out! We’re always happy to help and have the know how to do so.