8 things your realtor probably didn’t tell you about condo assignments

Andrew: On this episode, we’re going to talk about eight things your realtor probably didn’t tell you about assignments. Stay tuned.

Announcer: Welcome to the True Condos Podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew: Hi, welcome back to the show, this is Andrew la Fleur. Once again, you are listing to the True Condos Podcast. We’re speaking to you, the condo investor, and today’s subject is assignments. Assignments. So what is an assignment? An assignment is when you are able to sell your condo before you actually own it. So, when you’re buying pre-construction, you buy something, you sign a contract. It’s not going to be built for three or four years, and you have a clause in your contract called the assignment clause. You always want to make sure you have that, and it allows you to actually sell the contract to another buyer before you actually close on the property. So that is what an assignment is.

Why am I recording this podcast? I’m recording this because, well, a couple reasons. One is there’s obviously been a major run up in prices of condos over the past year or two. Prices have shot up dramatically, much more than they typically do, the historical average. So, a lot of people are sitting on a lot of paper gains, and they’re thinking about, for various reasons, they’re thinking about taking advantage of those paper gains and actually flipping those contracts. And the second thing is that with the recent announcement of the new stress test, the new mortgage rules, some people are having a hard time getting mortgages, or some people think they’re going to have a hard time getting a mortgage for whatever reason. So, they are thinking about not closing on these unit and selling them off.

So, there seems to be a … I don’t know if it’s a record high amount of interest, but certainly a lot of interest in the market right now. I’m getting a lot of calls and questions and emails about assignments and things. So I thought now would be great time to do this. It’s actually going to be a three-part miniseries, three-part miniseries, on assignments. This is part one. So, if you’re listening to this first, you’ve come to the right place. You want to listen to this episode before you jump to part two and part three, and so part one is eight things your realtor probably didn’t tell you about assignments.

Generally speaking, my philosophy on assignments, before we jump in, is that assignments should always be a plan B. Plan A should always be to grow your net worth and essentially bring your retirement forward, allow yourself to retire earlier by buying and holding real estate assets for the longterm. So, longterm buy and hold has always been my strategy. I never want to sell an asset that’s paying me money every month unless I need to. That’s generally speaking my philosophy. So, some people agree with that, some people don’t, but that is, in my opinion, the best way to grow your wealth is to be a buy and hold type of investor for as long as possible when it comes to real estate assets.

So, number one thing that your realtor probably didn’t tell you about assignments is, number one, assignment deals are not easy. Assignment deals are not easy. They’re actually very hard to put together. It’s not like selling a resale property. Some agents will tell you, “Oh yeah, no problem, you want to sell your condo by assignment? No problem, I’ll do that for you. I’ll help you out with that. Sign here, sign there, whatever. We’ll get this contract started.” They might paint a picture for you that they’re going to flip this condo for you. You’re going to make lots of money, and you’re just going to walk away, it’s going to be a piece of cake.

That’s not true. Assignment deals are not easy. It’s very common for assignment deals to take many months to sell. It’s very common for … If you’re trying to sell by assignment, you might get several contracts, several deals together that will fall apart at various stages of the negotiations before you actually bring together a firm and binding deal. This is common. And there are a number of reasons for that, and we’ll jump into that next, ’cause the second thing your realtor probably didn’t tell you about assignments is that most realtors don’t do assignments.

So, assignments are a specialty area of real estate. It’s not like something that anybody can just pick up and do. I would highly recommend if you are selling your … any condo by assignment, you always want to work with a realtor who has a lot of experience selling assignments. You never want to work with somebody who’s figuring it out for the first time through you, or who’s only done one or two. You want somebody who’s done a lot of assignment deals, because, as I said, they’re not easy. They’re very tricky. There’s a lot of extra considerations to think about, so you want to have your realtor as your quarterback on the assignment deal, but there’s other important players as well, including your lawyer and your lender, and that’s brings me to point number three is that most lawyers don’t understand them.

Most lawyers don’t understand assignments, so believe it or not, even though assignments have been around essentially forever, most lawyers still do not do many assignment deals either, just like realtors. So you want to, again, make sure you have a lawyer on your side who does a lot of assignment deals, who knows how to structure them, who understands the contracts, who understands the clauses to include and not to include. There’s not one cookie cutter way to do an assignment.

That’s again, one of the fundamental issues with assignments is you can be done many different ways, and so different lawyers have different approaches to it. So many stories that I’ve heard over the years of deals coming together where the one side of the … maybe the seller’s lawyer or the buyer’s lawyer knows about assignments but the other lawyer doesn’t. And so, the one lawyer is educating the other lawyer and the buyer and the lender and the realtor on how to do an assignment and what has to go where. And it’s just a strange scenario, but that’s a common thing that happens with assignment deals, and the … brings me to point number four, which is most builders hate them. Most builders hate them.

Most builders hate assignments. Most builders do not want to be involved with assignments, although they understand it’s part of the game, it’s part of … especially working with investors and selling condos to investors. You do have to give people the ability to sell by assignment, but most builders hate them and would prefer not to do them. Some builders will now days offer a free assignment so there’s not an assignment fee, but most builders are going to charge you something to do your assignment, to actually execute it. Because it is work for them as well, and again, there’s back and forth with builders and their administrators and their lawyers, and deals will almost come together and then at the last minute, they won’t, for various reasons.

So, most builders would prefer not to deal with assignments, and in a perfect world, most builders would probably just make assignments illegal or somehow make them go away, because they’d rather be doing other things than essentially selling the same unit twice. That’s not something they want to do, so something to keep in mind at another issue that is sort of friction in the system, and making it difficult for assignments to go through.

The number five thing that your realtor probably didn’t tell you about assignments is that most banks don’t finance them. So, most banks don’t finance them. So, yes, there are lenders out there who will do assignments, and you want to make sure you have a good mortgage broker or lender working with you and helping you get the assignment deal done. But keep in mind that a lot of banks just will not go near assignments. You need to, again, have somebody experienced on your side. Some banks may finance the original purchase price that you paid as the seller, but they won’t finance it on the new selling price that you’re selling it with the profit added to it. Some will, some won’t. So I mean, again, it’s a complicated situation you need to understand that if you’re thinking about selling by assignment. That is one of the challenges you or the buyer who’s buying it from you may face.

Number six thing that your realtor maybe didn’t tell you about assignments is that assignment profits are treated, generally speaking, talk to your accountant, this is not considered legal or accounting advice, but I will say, assignment profits are generally treated as income not capital gains. Income, not capital gains. So this is a huge thing. You really need to think through and consider and run the numbers for your situation. If you’re going to be taxed, if you make a profit on your assignment. Let’s say you bought a condo for 300,000, you sold it for 400,000 after expenses. Let’s see, you have a 100,000 profit.

That profit is going to be added, it should be, according to the CRA, it should be added to your income for the calendar year. So that’s going to be taxed at the highest possible marginal tax rate, whatever that is for you. Let’s call it 50%. So 50%, you’re going to be hit on 100,00. You’re only going to take away $50,000. You’re writing a check to the government for $50,000. On the other hand, if you’re selling a property that is a resale property, generally speaking in most cases, that is going to be considered a capital gain for most people, not for everyone. Again, talk to your accountant. But capital gain, you’re only tax at half the profits, so if your profit is 100,000, you only have to cut that in half, 50,000, and that amount is taxed at your marginal tax rate. Let’s call it 50%, so $25,000 of taxes versus 50,000 if you sold it by assignment. So again, that is a huge thing to consider when you’re thinking about selling it by assignment. Talk to your accountant.

Number seven thing that your realtor probably didn’t tell you, the CRA is cracking down on assignments. What I mean by that is that they have dedicated more and more resources over the years, especially now, to looking at who has done assignments, making sure that everybody has paid their proper taxes on those assignments as we just mentioned. Did they declare it on their capital gain on their taxes? Or did they declare it as income? That’s an easy on for them to go in and make a case and grab that money from you. But another interesting area that 95% of realtors don’t know about, even many lawyers, accountants don’t know about, is that technically speaking from what I have been told by the experts in this arena, accountants and HST experts, technically speaking, you are supposed to charge HST. If you are the assignment seller, you’re supposed to charge and collect HST on the original deposit that you paid to the builder plus the profit amount also.

So let’s say your original deposit was $50,000 that you paid to the builder, and then the profit amount that you’re going to get, the lift from the price you paid to the builder versus the price you’re now selling it to to the new person. Let’s say that was $50,000 as well. That’s $100,000 there. You’re supposed to collect and give to the CRA $13,000, 13% of that amount, the original deposit plus the profit amount. You’re supposed to collect 13% HST on that and give that to the CRA. So, either that comes out of your profit, which is huge, or you have to somehow convince the buyer of your assignment to pay that extra amount on top of the price, an extra 13%, which is huge. In either case, that is another major consideration that you need to think about and consider.

Now that being said, I will say that the vast majority of assignments that go through, people are not collecting this HST. They’re not remitting this HST to the CRA. I would have to believe, unless there’s some rule change, that the CRA is going to be coming after that HST money big time in the years ahead, because it’s just easy money, low-hanging fruit for them to go and grab from people. 99% of deals are not collecting this HST, are not sending it to the CRA, so it’s just something people are not doing, and so far the CRA has not made a major case for that. But the certainly are starting to, and I think that’s only going to increase in the future. So you need to consider that. It’s a major factor you need to consider.

And number eight, number eight, last thing I want to mention, eight things your realtor probably didn’t tell you about selling by assignment, is it is very difficult to get market value on an assignment. So if you’re looking to sell your condo by assignment, one of the challenges you’re going to face is getting full and proper market value, and you may understand why after listening to the first seven reasons. There’s so many challenges in getting a deal together. The other big challenge is most builders will not allow you to list your assignment on the MLS system. So the MLS system is the major, number one place where people look to buy property in Canada. So if you can’t list on that system, it becomes very difficult to get maximum exposure and maximum marketing for your property that’s for sale. So, again, all these things are headwinds that you’re facing and makes it difficult to get full market value on an assignment.

So, if your assignment’s worth 400,000, if it was a resale property, it would sell for 400,000 no problem. Well, if it’s an assignment, there’s going to be some discount to that. Another reason why there’s going to be a discount to that is a lot of people buying assignments, they’re cash-heavy investors. So investors that are sitting on a lot of cash because they need to come up with a lot of cash to close on an assignment deal. In most cases, you need to come up with the original deposit, pay it back, plus the profit amount. It’s a huge amount of cash that you need to make most assignment deal go through, and so, again, not a lot of buyers out there that have that kind of cash to make it happen. It’s cash-heavy investors. Cash-heavy investors, what do they want? They want a deal, and so they’re looking for things that are below market value. They’re not looking to pay full market value.

So those are some of the things that your realtor probably didn’t tell you about assignments. So, it leads me to the question of why bother at all? Does it even make any sense at all to ever sell by assignment? And the answer is yes. There are situations where it would make sense. I would say it’s not necessarily a bad thing to sell by assignment. Again, generally speaking as I started out the podcast, my philosophy is assignments should always be a plan B. Your plan A should always be to close on the property, rent it out, hold it for the longterm, but if there are situations … There may be situations where it makes sense to sell by assignment. So listen in to part two and part three of this mini podcast series where I’m going to discuss the times where it does make sense to sell by assignment, and also the situations where it does not make sense to sell your condo by assignment. So, hope you enjoyed this episode, and we’ll see you in part two and then part three. Thanks.

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