Wednesday, November 14, 2007

How Assignments Work.

An "Assignment" is a term that is much bandied about in Vancouver's property market these days. This is a result of the large volume of suites sold by Developers prior to the construction of the suites (pre-sales) caused by the rise in Vancouver's urban property market. Investors and pre-sale buyers have been buying and selling i.e. "assigning" these suites before they are completed.

What is an Assignment?

An Assignment in the real estate context is when the rights under a contract are transferred from one party to another.

When you buy a pre-sale suite from a Developer, you sign a contract where you promise to pay a deposit by a set time and then the balance of the purchase price upon completion of the building. Under this same contract, the Developer promises to build you a suite by a set time.

It is also possible to assign a contract on a property which is built. I will describe this in another post.

How do Assignments Work?

If the Developer agrees (This is critical) you, as the buyer of the pre-sale, may then sell the rights under the contract for your pre-sale to another person.

When the buyer of the pre-sale sells and transfers the rights under the contract between the buyer and Developer is called an Assignment of Contract. Its called this because when you sell an Assignment you as the seller assign your rights under the contract with the Developer to the buyer of the Assignment.

The buyer of the Assignment (henceforth the Assignee) reimburse the seller of the Assignment (Assignor) any deposits the Assignor has with the developer. The Assignee then gives the Assignor the profit (or 'lift") they agree on. When and how this "lift" is paid is completely negotiable.

How they REALLY work!

This all may sounds quite straightforward and easy (if my explanation doesn't make sense call me and I can explain). In practice Assignments are not.

The Developer has to agree to the Assignment for a legal transfer to occur. In many cases the Developer may even require you get their permission to even advertise your suite. Developers strictly control how assignments are marketed and sold and have all the documents required to assign your suite. Most important of these is the actual contract you will need to transfer ownership.

A good relationship with the Developer is key in selling an Assignment as the Developer is under no obligation to consent to an assignment. A bad relationship with the Developer can result in expensive delays at best and your inability to sell your pre-sale at worst.

A strong grasp of contracts is also very important in either buying or selling Assignments. When buying an assignment it is critical that the contract contains subjects and clauses that ensure the buyer receives all of the documentation on the Assignment as well as an escape hatch if it turns out the documentation is not available or not satisfactory.

Strong negotiating skills are also a must to get the best deal when buying or selling Assignments. All of the variables, vagaries, and details inherent in Assignments are all critical to getting you the best deal possible. Don't leave any detail out or once again you can be out of pocket huge amounts of money or face possible legal action.

I hope this post sheds light on this topic. Feel free to post your comments or drop me a line if you have any questions.

2 comments:

Anonymous said...

Interesting article Mike. A question: Do you find that sellers of assignments are quite flexible in the amount of money they are asking for? After all an assignment is a nice word for flipping.

Also, do you find that most people save money buying an assignment?

Mike

Mike Stewart an Downtown Vancouver Realtor with Century 21 In Town Realty said...

Hi Anonymous,

Thanks for your input!

It really depends on the suite and the seller. There is a lot of demand in Vancouver's real estate market today, so the owner of a suite that is special i.e. it has a good view, high up in the building, or has large outdoor space can demand a selling price at or close to their asking price.

An assignment is not exactly flipping. I would characterize flipping as two transactions within say a three month period. A person buys a suite, does some renos (or not) and then sells right away.

Selling assignments is more of a medium to short term investment, but I don’t see it as flipping. Over the last few years sellers of assignments have to hold for at least a year to make any net profit (after taxes, commissions, and developer assignment fees)

Yes, you can save money buying an assignment in several ways.

First, in a rising market you are buying a suite at a price set on the date you buy the assignment.

An Assignee buys an assignment in 2006 that the developer originally sold to the Assignor in 2005. When the suite completes and is registered at the Land Titles Office in 2008, the Assignee would pay the 2005 price (minus deposits paid by the assignor) to the developer. The Assignee also paid the Assignor the lift. If the market has risen to the point in 2008 that the lift plus the 2005 price is lower than the market value there are several ways the assignee can have saved money.

One saving is the CMHC premium required for a high ratio mortgage. Say the Assignor put down 5% on a $100,000 presale. A mortgage for 95% of the value of a suite is high ratio which require the costly CMHC mortgage insurance premium. If one puts down 20% you are low ratio and don’t need to pay the CMHC premium.

Now lets the property is worth $120,000 when construction completes and registers at the Land Titles Office.

With a market value of $120K the Assignee has over 20% down on the property so therefore a mortgage on the suite would be low ratio and not require the CMHC premium.

The second way money can be saved with an assignment is the discount the market gives suites a buyer cannot walk around in, touch, or see built. Many buyers are not able to visualize a built suite from a set of drawings, a floor plan, or a piece of sky. Fewer potential buyers for assignments means less demand resulting in a relatively lower price for an assignment of contract.
The last way assignments in a rising market allow investors to build equity in the real estate market without paying interest on a mortgage, maintenance fees, or management fees.

I’d love to hear your thoughts.