mortgages

Kristi Holz FAQs

Assignments of Contract on New Construction

If you’ve been looking for a condo in a brand new building, you may have come across “assignments” as an option to buy. If someone purchases a condo in a yet-to-be-finished new condo building and then wants to sell the unit prior to the completion of construction, they will need to “assign” the contract to a new buyer. The unit can’t be officially sold since the building isn’t completed yet, so instead the rights to the original purchase contract are sold to a new buyer, with the new buyer entering into the already agreed upon pre-sale contract with the Developer. The new buyer will receive the same information that original buyers received during pre-sale, which include the Developer’s Disclosure Statements, floor plans, colour schemes, etc. Any assignment buyer will need to know the important details of purchasing a pre-sale condo as well as the financing requirements of an assignment deal. The developer will need to approve the assignment sale and often only allows assignments when the building is sold out. 

Financing for Assignment Sales

Financing is where things get tricky with assignments deals, as you may only be able to get a mortgage on the original purchase price of the condo (minus the original deposit), not the “lift” you’ll likely be paying the Seller. The “lift” is the difference between the Seller’s original purchase price and the price you pay the Seller. In a rising market like we’ve seen the last few years, it’s common for Sellers to be able to make a profit on their original investment.

This mortgage restriction with assignment deals is what makes these units really tough for the average person to be able to afford, as you generally need a lot of cash in order to purchase them. Check in with your mortgage broker to verify current lending requirements surrounding assignment sales – mortgage rules can change so this post may be out of date.

When looking to purchase an assignment sale, you need to find out the Sellers original purchase price, original deposit and whether any credits will be applied to the purchase by the Developer.

The contracts for these purchases are different than a standard contract. The entire purchase requires much consideration to ensure there are no surprises.

Give me a call if you have any questions: Kristi at 778-387-7371 or kristi@realestatevancity.ca.

DISCLOSURE: This post only an example. Details regarding GST, Property Transfer Tax, any applicable Capital Gains Tax, Lawyer Fees, Contract Details etc may be different depending on your situation, potential new rules regarding government taxes, the original Contract, Developer’s Requirements and more. Make sure you speak with professionals (Realtors, Tax Professionals, etc) about your particular situation.

Assignment of Contract Example

Seller’s Asking Price for the Assignment Sale: $514,900.00

ASSIGNMENT PRICE CALCULATIONS

Original Contract Price: $399,900.00

Upgrades (i.e. hardwood floors): $0

Extra Parking Stall: $25,000.00

Credits from the Developer: $0

Total Original Purchase Price: $424,900.00

Lift / Assignment Price (i.e. the Seller’s profit): $514,900 – $424,900 = $90,000.00 

PURCHASE PRICE CALCULATIONS

What the Assignee (New Buyer) Owes the Assignor (Seller/Original Buyer)

Assignment Price: $90,000.00 ***Typically due upon Completion***

Replacement Deposit (i.e. Original Deposit paid by the Seller/Original Buyer, say 20%): $79,800.00 ***Typically due with an Accepted Offer***

Total Assignment Amount (i.e. what the New Buyer owes the Seller): $169,800.00 ***This (likely) cannot be mortgaged***

What the Assignee (New Buyer) Owes to the Developer

Original Purchase Price + Extras: $424,900.00

LESS:

Replacement Deposit: ($79,800.00)

Credits from the Developer: ($0)

Assignee Obligation to Developer (i.e. what the new Buyer will pay the Developer): $345,100.00 ***This can be mortgaged***

What the Assignee (New Buyer) Owes in Added Fees

Applicable 5% GST (on Original Contract Price): $21,245.00

Property Transfer Tax (on Seller’s New Asking Price): $8,298.00

Lawyer Fees: $1,500.00

Total Added Fees: $31,043.00 ***These fees cannot be mortgaged and are due on Completion***

IN SUMMARY

Total Amount the Assignee (New Buyer) will Pay: $545,643.00

Total Mortgage-able Amount: $345,100.00

Total “Cash” Needed by the New Buyer: $200,543.00 

Note that the cash needed for an assignment purchase is more than you would need for a typical $515k purchase – and therein lies the problem for most Buyers.

Kristi Holz FAQs

Down Payment vs Deposit

One of the biggest details Buyers need to prepare for before truly starting their search is their financing, and how much cash they’ll have towards the purchase, specifically for your down payment and deposit (with funds for property transfer tax and renovations close behind). 

I have a lot of clients who are confused about the difference between a down payment and deposit, so I wanted to go through the details here. 

What is a Down Payment? 

Your down payment is the amount of cash you’re putting towards to the price of the property. Your mortgage approval is based on, among other things, the amount of down payment you have. There are specific requirements in Canada for the amount of down payment needed depending on the type and price of the property. A down payment of less than 20% down means you need to pay mortgage insurance, which is a small insurance premium added to the cost of the mortgage.

Your full down payments funds aren’t needed until just before the Completion Date (which is the day the your purchase funds are sent to the Seller and the title of the property is transferred to you) however you’ll need to provide a portion of your down payment during the offer process as a “good faith” deposit. 

What is a Deposit? 

Every offer for a home (whether a pre-sale or a standard purchase) requires a deposit of “good faith” money indicating that you have interest in buying the property that also gives the home Sellers some insurance if the Buyer doesn’t complete the sale. This deposit forms part of your down payment. 

The deposit amount is typically around 5% of the purchase price and is typically due once the Offer to Purchase is a firm contract (i.e. when the Buyer submits a subject free offer, or when the Buyer removes the conditions on their offer), though the deposit may be due upon Offer submission. The deposit amount and deadline to submit will be specified in your Offer. 

Keep in mind, if you are buying a property with a 5% down payment, your deposit would be the entire down payment amount. 

When a Buyer submits their deposit, their Realtor submits the deposit to their office where it remains in the Brokerage bank account. A few days before the Completion Date, these funds are sent to the Buyer’s Lawyer to package the amount with the rest of their down payment and mortgage funds. 

One of the most important details of the deposit is that the funds need to be liquid if you will be putting in offers to buy properties. You will need to give your Realtor the deposit in the form of a bank draft, which means the money is removed from your account when you take out the bank draft. Keep in mind that you are on a timeline when you have an accepted offer on a property, so you need to do your due diligence and come up with your deposit before a certain date and time, otherwise the contract terminates. If your deposit funds are sitting in a different account of yours, or perhaps are sitting in some investment portfolios, it may take a few days for the bank to transfer the funds to an account where they can be removed. You don’t want this timeline to ruin your chances of officially buying a property! If a family member is paying your deposit, it would be beneficial to have them forward the deposit funds to you ahead of time so you have the funds sitting in your savings account and ready to be pulled when needed. If you bank with Tangerine you need to be aware that deposits cannot be pulled at a brick and mortar location so you need to order the deposit ahead of time and have it delivered to you. It can take a few days for the deposit to be delivered so ensure you understand the timeline before you offer.

For more information about your down payment and important information you should know, talk to your mortgage broker. For more information about the deposit process, talk to your real estate agent.