Assignment agreements are booming in the Toronto condo market. Is Hamilton next?

Indulge me for a moment with a brief hypothetical.

Say you’re a renter who has some cash burning a hole in your pocket and a desire to climb on to the property ladder. You’ve decided that a cool urban condo fits your lifestyle and your price range. There’s a new project being built in your ideal neighbourhood and the price is right – you take a leap and buy the condo at an opening sales event.

A few years pass, construction is well underway. However, that unit you once thought was big enough to host a banquet now seems too small to fit a kitchen table. You’re ready to scale up but the building hasn’t closed.

Ok, this situation was only in jest. But it’s been a reality for many people in places like Toronto, where many condo developments have been delayed coming on stream and owners need out. And since Hamilton has also jumped aboard the condo bus lately – with over 20 multiple unit developments happening in the core, as of late 2014, and more in the development stages – it’s not unreasonable to think this could be common here at some point, too.

On a personal note, we’ve been there. Remember that hip Liberty Village loft we mentioned in a previous post? Well, 500 sq ft may sound like a lot of space when you’re full of youthful optimism. But it’s a lot smaller after a wedding and an expected family expansion.

The solution: enter the “assignment agreement.” Assignments are an innovative take to these transactions, created by the Ontario Real Estate Association a few years back. This was done in response to preconstruction condo buyers in Toronto needing, or wanting, to sell their units before the building officially closed.

In many cases, assignments are a win-win. Buyers can often get a discount on the price (as its hard to charge a premium on an unfinished unit) and possibly even have the chance to pick the interior finishes. Sellers get their initial deposit back plus any appreciated equity, while getting a head start on the onslaught of fellow sellers who list once the building closes.

However, for an assignment transaction to be successful, a few essential elements are needed.

First, the project developer needs to allow assignments to take place. Developers will usually start the exploratory and excavation process once they’ve sold somewhere around 80-85% of the building’s units. Keep in mind, that can leave anywhere from 15-20% unsold, which affects the developer’s bottom line.

Allowing assignments would essentially mean that unit owners will compete with the developer’s units for buyers. Some developers will charge a fee or put conditions on the assignments, such as not allowing agents representing competing owners to list on MLS. If you are considering buying preconstruction, it’s highly recommended that your lawyer check for assignment clauses in the agreement during the initial 10-day “cooling off” period.

Ok, so let’s assume that the developer is fine with assignment deals and you’ve got a property to sell. You’ll need an agent to make the deal. You’d probably be well advised to find an agent who has experience in these types of transactions. Or, at the very least, someone who has sold preconstruction units at a launch event and has a strong network of potential clients. Reason being is that it takes a special type of person to essentially sell thin air, with nothing to go on except good faith and a floor plan drawing.

Similarly, you’ll also need a special type of qualified buyer to complete the deal. Think about how hard it is (for most people) to make a decision on a property that you’ve walked through multiple times during a showing or open house. Now, think about how difficult it would be to picture your life in a unit where you can’t measure the rooms, mentally lay out your furniture or see the view out of the windows.

Oh ya. Remember how we said that visionary buyer also needed to be “qualified”? Reason is that while the real estate industry has progressed to accept this type of deal, banks have been a little less enthusiastic. To their credit, lenders assess value based on the assessable property. In such cases, banks will only have information from the original sale and not be able to consider fluctuations in the market since then. For example, say you bought a unit for $100,000 two years ago. Since then, the market has taken off and fair market value for that same unit is now $150,000. Banks will generally only approve a mortgage based on the original sale price, leaving the buyer to cover the difference with cash. As you can imagine, that could be tens of thousands, if not hundreds.

In our situation, the stars aligned and we were able to get a respectable return on our investment. Others haven’t been as lucky.

So far, it’s still early days in Hamilton’s condo boom. But as more buildings go up, it’s safe to believe that Hamilton buyers will start hearing the term more often.

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