Does it make sense to purchase a property on assignment?
Sale of properties on assignment has been prevalent for a long time now and most of you might have heard of it or maybe even considered it in the past. Usually, it has been about investors buying properties sold by wholesalers or other investors trying to offload preconstruction properties right before closing.
But recent changes in tax rules and state of the interest rates & real estate market have resulted in a shift in the return profile and demand for such assignment deals. You might also have come across news articles highlighting such a situation. And if by any chance you have missed them (I am surprised!), then let me bring you up to speed! Checkout Globe and Mail, Star, CTV , CP24 , CBC and finally Bloomberg
While this can be stressful time for anybody holding such a purchase contract given the challenges with qualification, higher interest rates, and possibly lower valuation; this can also be an opportune moment for somebody looking to buy their first home or an investment property. The assumption here is that this prospective buyer is well qualified and has the financial ability (not discounting the mental strength required!) to buy and hold such a property. Such a transaction (sale-purchase) is called as an “assignment” sale as the person holding the current purchase agreement (with another seller or builder) does not legally own the property yet.
Some of the advantages and disadvantages for the prospective buyer with such a transaction would be:
In today’s market, the current contract owner is potentially a motivated seller and may be more agreeable to a lower price provided there is not a lot of interest
Potentially a smaller pool of buyers is aware of the property being available for sale as its not on MLS
Can potentially secure the property for a price lower than resale properties in the same area or neighbourhood
Such properties are not listed on MLS and so your realtor or you would need to be aware of such opportunities. There are several social media groups and mailing lists where you can find them.
Other potential buyers who are aware of such an opportunity might be more aggressive to secure the purchase
If pre-construction property, a builder’s approval is required for such an assignment, and they may have a fee for such a transaction (more below)
If resale property, a wholesaler will charge a fee + this approach would be for a more experienced individual who can act without the assistance of a realtor
Additionally, there are several aspects to such an assignment transaction covering, legal and financing domains. While I will provide some pointers regarding financing, I would highly recommend that you consult with a qualified attorney regarding the legal aspects of such a transaction before heading too deep into one.
Some of the financing considerations that you need to be aware as all the banks and lenders do not have similar requirements or lending policies and more so when it comes to assignment sale-purchase transactions. So, before getting into such a transaction, you need to aware of what your financing options would be. It cannot be an after-thought.
Most banks will accept only assignment deals for new construction properties or properties being sold by the builder. They may not accept re-sale purchases
Most banks / lenders will only use the “Original” purchase price and NOT the value of the assignment purchase and provided its supported by appraisal.
Any fee paid to the builder or wholesaler for approving the assignment might get deducted from the eligible mortgage amount
Some lenders will allow assignment purchases only within family members or Non-arm’s length parties
Many lenders do NOT finance such purchase transactions
Many lenders will finance assignments only when the buyer is buying the property for Own Occupancy (Principal home)
Many lenders will restrict your mortgage options. Only mortgage insurance-based financing or amortization may be limited to 25 years
Banks and lenders will want to see both purchase agreements (Original agreement with Builder + Assignment Agreement + Builder’s approval)
All in all, this year can potentially provide a fertile ground for buyers and investors who are looking to gain an edge and snag some properties at attractive prices. You will need to put in some work discovering such opportunities and be prepared to act when you find such deals.
Wishing you the very best!