Developers Presale Assignments

What is meant by a Developers assignment of contract?
An assignment of a contract in real estate development of new presale homes is simply a transaction of a home in which the original first buyer of the presale “assigns” or transfers his or her rights and obligations of the original Agreement of Purchase and Sale to the second buyer for a profit before the original buyer closes on the property. The second buyer is the one who actually closes and registers the property in land titles (not the original buyer). Because completion has not occurred, the second buyer is not the legal owner for the property yet, therefore they require consent from the developer(often the developer may charge a fee for this service). Most developers will not allow an assignment until the entire complex has been sold out because it would mean them competing against their own product for a sale.
If the entire project is sold out, this means often the original buyer can make a tidy profit on a longer closing, often 1- 5 years away before completion.

Are there any restrictions on assignments?
Read your original contract from the developer, they should have any restrictions if any listed there. 
You might encounter some of these terms on a pre-sale in your contract signed between you and the developer:
  • The developers approval (meaning if you sell it, there must be a subject to the developers approval for it) Plus usually there is a fee to be paid to the developer for doing so - typically 1% -2% of the sales price
  • Restrictions prohibiting it to be advertised on MLS - many developers do not allow the advertising and sale of assignments until the building is completely sold out.
  • A time frame when you cannot assign the contract
What are the disadvantages of an assignment?
One of the biggest disadvantages is the buyer getting Financing – a lot of lenders will not lend on the “assignment” as it is not registered in land titles yet. Lenders always want to secure their interest by placing the mortgage on title and how can this be done if its not registered/completed yet? So often you are restricting yourself to finding a “cash buyer” who will pay you back your original deposit plus the profit (if any). NOTE: If you are purchasing an assignment check with your lender first before writing an offer, they may be able to use something else you own as collateral for the loan.

What are the advantages for the original buyer assigning the presale?
1. The seller (original buyer) may be able to avoid the builder’s closing costs and land transfer tax associated with the subject property.
2. The seller avoids the carrying costs (mortgage, maintenance fees, taxes, etc.) since he/she sold it before it registered in land titles.

Are there tax implications on assignments?
It is best to talk to an accountant to determine what you may incur. In general though, any profit will be capital gains taxed since you did not occupy the property as your principal residence and is supposed to be reported to the government as it is subject to tax as part of your declared income.

Are there any risks involved?
There is no guarantee that the project will complete or the second buyer will be able to complete neither. Ever hear of developers going bankrupt before completion? .....OR, the party you sold it to dies within that 1-5 year period before closing?... Or a loss is incurred if the market falls in that time period of waiting to close and the second buyer walks away from their deposit? The original buyer should always be aware that if any of these events occur, they are still on the hook to complete the original contract with the developer.

In conclusion, there may be many risks associated with buying or selling a presale so make sure you understand these facts first - you may want to discuss it with your REALTOR who will guide you in the process.

If you’re thinking about assigning your contract call or text Donna Fuller @ 604-683-1393 today to determine what is right for you or you may email me by clicking on my contact details here: CONTACT ME

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 The information contained herein has been obtained from sources deemed reliable at the time but is not guaranteed.