Are you thinking about purchasing a presale resale property?
It isn’t always as easy or glamorous as you may think. Our blog below will help you better understand the risks before you purchase a presale resale from someone.
What Is A Pre-sale/resale and how does it work?
First of all, you need to understand what an “assignment” or “pre-sale/resale” actually is.
According to the Real Estate Council of British Columbia, an assignment is defined as follows:
“A contract assignment occurs when a buyer transfers the contract to buy property to someone else before the completion date. The buyer can transfer the contract for any price, even for a higher price than they paid for the property.” In theory, the new buyer is buying a “resale” of a previous “presale”. Hence, the coined term “presale resale”.
For our purposes, there are a few parties involved in this transaction. We will refer to the original buyer who entered into the contract with the developer as the “original buyer”. The purchaser under the assignment contract will be referred to as the “new buyer” and, finally, the developer who is building the development and contracted with the original buyer will be referred to as the “developer”.
We will refer to this contractual arrangement in this article as either a “presale resale” or an “assignment”. A presale resale, in regular terms, occurs when the original buyer [assignor] who purchased from the developer chooses to “sell” their contractual rights in their contract to a new buyer [assignee]. The original buyer is not truly selling the property (because they technically do not own it yet) but, instead, is technically selling his or her interest and rights in the contract [i.e. the right to purchase the property on the terms of their original contract]. The new buyer [assignee] of the assignment is essentially picking up right where the original buyer left off and steps into their shoes as the buyer under the contract with the developer. In many cases, this assignment of the contract requires the consent of the developer and may also require the payment of an assignment fee to the developer in accordance with the terms of the contract. In some cases, assignments may be completely prohibited. The terms of the contract will indicate what is required and it should be determined who is responsible for completing the process and paying any associated costs.
Standard practice has changed since presale resales started to become commonplace. In many cases now, the developer can continue to hold the original buyer, as well as the new buyer, accountable under the contract until it closes – in other words, the assignment does not relieve the original buyer from their obligations under the contract. So, whether you are the first or last buyer in a string of assignments, everyone may still have liability under the contract until the completion of the purchase has occurred.
Assignment sales can be complex transactions with specific considerations and should not be entered into without getting sufficient advice to understand the nature of the deal as well as the risks associated with them.
Common Pitfalls of Buying An Assignment
NO NEGOTIATING LEVERAGE:
Because you, the new buyer [assignee], are taking over the original buyer’s [assignor’s] contract, you are not able to negotiate (or renegotiate) terms of the contract with the developer (at least you do not have the ability to push those negotiations as the developer already has a firm and binding contract). Instead, you are generally only negotiating the amount you are willing to pay the original buyer to take over their rights in the contract and the terms of that assignment. When you purchase a new home “presale” directly from the developer, you (along with your Realtor®) generally have the ability to negotiate the price, terms, colour scheme, upgrades, allowances, and maybe even parking and storage allocation in order to get you the best deal. With an assignment, you take over the exact terms that the original buyer negotiated with the developer (subject to any changes you may be able to get the developer to agree to, keeping in mind they are not required to make any changes).
If you are comfortable with the terms the original buyer has negotiated, this may be acceptable to you but if you want to see changes made to the existing contract you’re offering to take over, this can get more complicated.
YOU MIGHT PAY MORE:
Many original buyers who are looking to sell their contractual rights via an assignment likely entered into the contract initially for the purposes of an investment or on speculation of hopefully making a profit if the units sold out and there was a lot of demand (or if value increased prior to the completion date). As a result, the purchaser of an Assignment will normally be paying more to purchase the property than the original buyer was expected to pay. In some cases, this may be appropriate (i.e. if the value of the property has increased over time) but in other cases, it may simply be an additional profit for the original buyer for being at the right place/time to contract to purchase the unit.
YOU LIKELY GET FEWER CHOICES:
As discussed above, when purchasing a presale directly from a developer, you may be able to get involved in putting your own touch on your new home. Whether it be picking out paint or cupboard colours, to choosing what upgrade package suits you best (i.e. entertainment, cooking, relaxing), when you purchase pursuant to an assignment, you are frequently stuck with the decisions the original buyer made for the particular property. In some cases, there may be an ability to negotiate directly with the developer to get those upgrades (particularly if the unit has not be constructed when you acquire the assignment) but there is no requirement for the developer to agree to those changes (or the prices they’re prepared to offer them to you at).
YOU COULD PAY HIGHER LEGAL FEES:
As assignments are more complicated than your typical real estate purchase, you may pay increased legal fees compared to what you would pay for a normal presale property. You would need to confirm whether this is the case with your specific legal representative.
YOU COULD PAY MORE TAX VS. THE ORIGINAL BUYER:
As the new buyer, you will be responsible for paying property transfer tax (if applicable) on your purchase. Property transfer tax is based on the value of the land and any improvements to it on the date your property transfer is registered – this does not necessarily line up with the purchase price in your contract or your assignment, and you could see a reassessment if the Ministry of Finance determines fair market value is different from the amount declared on the filing.
GST may be more complicated as well as you would need to consider GST on the actual purchase price under the contract you are assuming, as well as GST on the assignment amount that you’re paying to the original buyer. The latter is frequently included in the assignment amount you agree to pay (at least in the standard Real Estate Council assignment form) but it should always be considered in the transaction so that you’re aware of the terms and costs you’re agreeing to. Always get tax advice from a certified accountant to ensure you’re aware of the potential tax liabilities arising from the transaction before you are committed to the transaction.
Why would someone want to assign their condo?
Frequently with pre-construction sales, there can be a lengthy gap between when the time the original contract is entered into and the final closing date once the units are ready for occupancy. Most presale resales happen purely upon speculation of the market. The process allows someone to hedge the market and perhaps put down as little as 10% on the contract, and then assign it (for a profit) before the final closing costs are incurred, down payment is made and any financing takes effect.
Alternatively, although not as common, a buyer’s life circumstances may change during that time (i.e. marriage, divorce, having children) which ultimately leaves them with a decision to sell if the home no longer works for their purposes.
If you are looking at a presale resale, we recommend that you look at all current development units that are available for purchase directly from the developer or others with similar product (while this may mean a higher purchase price than a property contracted a year earlier, it will give you some more control over the property). Usually you will find that there are many options to choose from which may assist you in making the best decision for you (even if that means purchasing the unit under assignment). Maybe the presale resale is the right choice for you but having a professional seasoned Realtor® who is familiar with the process (as well as the pros and cons) guide you will only make the final decision that much more suitable for your purposes.
In the end, we recommend that you do your homework and be prepared. If you are thinking of purchasing a presale resale (assignment) having a trusted and informed Realtor® guide you through the process is imperative.
Contact our Kelowna Real Estate Pros team of Nyrose and Associates today if you have any questions regarding buying an assignment (and of course, we always recommend that you speak with your lawyer/notary regarding the process as we are unable to provide you with legal advice on the contract or process).
One of our trusted Lawyers we work with and someone who helped in the writing of this Blog is Una Gabie from Touchstone Law Group , she is a great resource for helping in any presale resale transaction that you might have.