The Real Estate Podcast

The Truth About Assignment Sales: A Guide for BUYERS | The Real Estate Podcast EP305

In this episode, Adrian Trott and Ariel Kormendy dive deep into the world of assignment sales, focusing on what buyers need to know in today's market. From understanding assignment sales to key insights on negotiation, legalities, and financial considerations, we cover it all. Whether you're thinking about buying an assignment or simply curious about the topic, this episode will help you make an informed decision. ************************ 0:19 – Intro 02:39 – Article Discussion: Interview with Minto CEO 03:58 – Why There's No Condo Market Crash 08:20 – What is an Assignment Sale? Definition and Explanation 09:01 – Benefits of Buying an Assignment Sale 10:00 – Negotiation Insights: Dealing with Desperate Sellers 11:09 – Understanding Legal and Financial Implications of Assignment Sales 12:55 – Hidden Costs in Assignment Sales 15:51 – The Importance of Reading the Contract 17:03 – Real-Life Example: Assignment Sale Complications 18:08 – How to Protect Yourself: Legal Caps and Lawyer Reviews 19:00 – Mortgage Challenges When Buying an Assignment 20:41 – Quick Closing with New Construction Assignments 21:27 – Is Buying an Assignment Sale Worth It? 31:30 – Outro/recap ************************ Want more real estate podcast discussions? Watch it here: youtu.be/uLhNb8fdHt4 Listen to it here: http://www.soundcloud.com/ktrealty Catch clips and highlights of the show here: http://www.instagram.com/kormendytrott ************************ Our Social: Instagram: www.instagram.com/kormendytrott  YouTube: www.youtube.com/user/kormendytrott  Facebook: www.facebook.com/kormendytrott  Twitter: www.twitter.com/KormendyTrott Soundcloud:http://www.soundcloud.com/ktrealty  LinkedIn: www.linkedin.com/company/ktrealty  Pinterest: www.pinterest.ca/KormendyTrott  TikTok: www.tiktok.com/@kormendytrott?lang=en ************************ In 2011, Ariel Kormendy and Adrian Trott formed The Kormendy Trott Team, now often referred to as KT (thanks to our logo!). The foundation of KT is built on providing unmatched value and attention to detail in everything we do. From our ever-expanding, comprehensive list of exclusive services to our expertly trained team, you will receive the highest level of care throughout your entire real estate journey. Originally a team of two in Milton, Ontario, the KT Team has grown into a large team of exceptional REALTORS®, a client-care department, and now includes KT media, KT Commercial and KT Property Management to provide our clients with a complete lineup of genuine, professional, and proven services across Halton Region, Peel Region and the surrounding Regions within the Greater Toronto Area. We’d appreciate it if you’d subscribe and follow us for behind-the-scenes footage, real estate tips, industry secrets, exclusive listings, The Real Estate Podcast, and more!

Duration:: 32m
Broadcast on:: 16 Sep 2024
Audio Format:: mp3

- There is a person that we know, that we know, we'll leave it at that, we'll leave it at that, purchased a property, sold it as an assignment a year later, but when it actually got sold and the builders saw what it sold for, they jacked up the assignment fee significantly like 4X. - Hey everybody, welcome back to the Real Estate Podcast. Today we start episode one of a two part series on assignment sales and today we're talking to buyers. Enjoy. (upbeat music) - Welcome to the Real Estate Podcast, your go-to source for raw, unfiltered stories and expert tips. Whether you're a buyer, seller, tenant, landlord, or realtor, join us as we dive into the world of real estate. (upbeat music) - End of summer. - Yeah, we're getting there. I mean, you never know, September's a funny month, September can, you can have beach days, but you're wearing sweater in the evening. - So, I wanna chat with you. - Or with your audience. - In this episode. - Yes. - And in the next episode. - Two part. - Two part. - About assignment sales. - All right. - Why did I wanna talk about this? - 'Cause it's relevant. - And there's a ton of assignment sales right now. - Yes, especially in the condo segment. - So we're gonna get into it, these are gonna be quicker podcasts, but I wanna open it up to discussion because there's a lot of our clients and a lot of listeners that are either considering buying an assignment or sellers that have purchased a pre-construction property and for one reason or another might need to sell it. And we'll talk about that more in the next episode next week. So this week we're focusing on buying an assignment sale. So I made some notes and we'll kind of chat a little bit. - It'll be hard not to the line between the two is so fine. - Well, some of the information for buyers will be relevant to your sellers and vice versa. There is some more particular information about both ends of it that I think are important to know. - Yeah, well, and these will be fairly quick episodes. So the viewer today focusing on educating buyers of assignment sales, we'll just get into the meat of it so they can make an informed decision. - So I wanna talk about the why a little bit before we get into those tips and that discussion. And there was an article on Monday, September 2nd in the Toronto Star, written by Jared Linzon, which is essentially an interview with the CEO of Minto. And Minto is a pretty large developer. They've built over 100,000 properties. They focus on the North American market, predominantly in Canada and the US. They build a decent quality product. And the article went into talking about why he doesn't think there's going to be a condo bust, right? 'Cause there's a lot of condos on the market of crash, a condo market crash in Toronto specifically. And there's been a lot of news and a lot of articles about this because of the sheer number of condos that are available for sale or for assignment. And even for lease, quite frankly, in the specifically downtown core of Toronto, there are a ton of condo listings, a ton of assignment sales. - Some would argue we've already had a bust. So that seems like a strange argument. - But this is focusing specifically on the condo market, which I find interesting because I think you're right, that the market as a whole had that, I don't know if you wanna call it a bust or even contraction or whatever, but condos haven't rebounded quite as much yet. And the inventory hasn't depleted as much yet. And there are still a number of properties coming on the market. And what I've noticed is that the bulk of assignment sales are condos. And it got me thinking, why is that? - Now, that's not to say there aren't a lot of detached homes or town homes or semi-detached homes that are available. Like there's a ton of everything right now available as assignments, I'm sure you've seen a lot of them. But there's more condos. And the real reason is cost. - Well, that's cross-board. I think there's also probably a higher concentration of investors buying them. - Well, that's my point is a lot of investors that planned to, some may have planned to flip them. So they bought them on SPAC and either wanted to assign it before it closed. Then we'll talk about the pros and cons on both sides. - Well, and these were purchased two, three years ago. - Potentially, maybe even more for some condo developments. - But if you look at the numbers in Toronto, to buy something for $1,200 per square foot in a condo isn't unreasonable. So you're paying 600 grand for a 500 square foot. - I would probably word it to say isn't uncommon. - Sorry. - I would say many people would say it is unreasonable. - Yeah, yeah. - What I meant was-- - No, I know, just. - Yeah, no, it's definitely a little bit unreasonable. Although some would debate that if you look in other major metropolises. - You sure you go to New York and absolutely. - That Toronto might be cheap, although cost of living as a whole is quite high. But anyways, $1,200 per square foot is common or was common, maybe even higher, not too much under a thousand bucks a square foot, that's for sure. You'd have to go to areas like Milton or Oshor, Whitby or whatever. So you're paying $1,200 a square foot. So 600 grand for a 500 square foot studio apartment. And what is that rent out for? Couple grand a month, depending on the building, your mortgage with 20% down is probably $2,500 a month. Plus now you have your maintenance fees and taxes. So you're at, I don't know, $3,500 a month. So you're losing $1,500 a month. That's a huge percentage to be losing. So these investors are all saying, well, I'm not gonna close on this to lose $1,500 a month. Now the problem is, they bought it for 500 and now it's probably worth 450 or 400. - Right. So you take the loss over a short term or a long term in the hopes of it improving. - Exactly. So this brings in potential buyers because now buyers are seeing a deal. This unit sold for 500K two, three years ago, brand new. It still is brand new 'cause it's not completed. And I can buy that contract for and save myself 50 grander, whatever that amount is. So we're gonna dive into chatting about some of these, I don't know if they're tips, but some insights. So the first thing, let's talk about what an assignment sale is. - So quite simply is a buyer's ability to purchase a contract to close on a pre-construction home where the original buyer has not yet closed. - I'm gonna correct you just, you're absolutely, that's a good definition. It doesn't necessarily need to be a pre-construction home. - No, sorry, you're right. - It's a contract. - You're buying a contract before the contract ends. - Correct, before it closes, yeah. So let's talk about the potential benefits. So I just mentioned one of them. The benefit of buying an assignment sale could be that you're buying it at a lower price, whether it's lower than the initial contract was or potentially lower than the resale market is, depending on what market you're buying in. So currently in September of 2024, if you're out in the market to buy an assignment sale, I would say chances are better than not that you are buying it for less than the original contract. - So there might be a deal. - Yes, if I was a buyer out now looking at assignment sales, I would just be shopping around low-balling everybody because somebody's gonna give, because these people need to sell, otherwise they would not be selling. - That's right. And I wrote that down as one of my topics to discuss is the negotiation. So just because there's an assignment sale doesn't mean that the seller is desperate to offload that unit, but-- - Or reasonable, maybe they don't have realistic expectations. - Right. However, having said all that, there are gonna be some people that cannot close. They legitimately cannot get funded. They can't get a mortgage. They can't get alternative financing. A lot of it probably has to do with the shift in the market and the fact that the unit is worth whatever 20% less than what the contract is. So there goes the dump. When you buy a pre-construction home, the chances are over the course of a few years is that you're gonna put several deposits down, 30 days, 60 days, 90 days, 180 days, whatever. And that probably adds up to about 20% of the purchase price. So if the price correction in the market now says that that unit is worth 20% less, you've lost your deposit. - Well, I think that's the quick way to determine how to negotiate from a buyer's perspective. Because you know how much skin the seller has in the game. - Do you wanna lose more? - So that's the point is, well, I think from a most seller's perspective too, though, is they're saying, "Okay, this is how much I'm gonna lose if I walk away." Even though that's not necessarily the case, it could be more potentially, but that's probably the more the mindset. - Well, you say walk away, they're not walking away. They could get sued too. - Well, that's my point. But I think a lot of them don't perceive that risk until it happens. I think most of them say, "Oh, I've got 100K, am I willing to walk away from 100K?" Whatever the number is. So from a buyer's perspective, I think if you could get as much of that as possible, I think a seller would be likely convinced to lose slightly less than that to you, then all of it to the builder. - Yeah. Yeah, so in the current market though, you gotta think to your point, you shop around, if you're not picky and you wanna buy an investment property right now, you shop around and you find that desperate seller that unless they assign it, that they're screwed, they're up the river. - Yeah. - Other potential benefits, you avoid bidding wars. So not often that you see multiple offers on an assignment sale. So as a buyer, that gives you, again, negotiation, upper hand on negotiation. - Another thing for buyers is a lot of the available assignments aren't even listed because developers don't always allow purchasers of developments to advertise their assignment publicly because the builder probably still has units for sale and they don't wanna compete. So it's in their contract that they can't. So your best bet is to connect with an agent, a real estate agent because they'll have the inside scoop on various sources where real estate agents communicate about these things that aren't publicly available. - Contractually, you went a little off topic, but that's okay, I'm with you. You didn't read my notes. You didn't read my notes to get the flow. - I think we're flowin'. The flow's movin'. - So contractually, a lot of builders and you gotta know the contract. You gotta read the contract. You gotta have a lawyer review it and this is for both buyers and sellers. Like get your lawyers involved. - No, just for buyers. Next week, we'll see you for sellers. - All we'll do is replay this and just dub the word seller over buyer. - Yeah. - So I don't know too many builders that allow the contract holder, the buyer, to publicly advertise that contract for sale. - Very rare. In fact, I imagine that the vast majority of publicly advertised assignments right now are not supposed to be listed. - Correct. - It's just the developers not monitoring it. - Yeah, yeah, for sure. So that means if you have a realtor, they cannot put it on MLS or their website or any of that stuff. It cannot be public. - In fact, a little off topic, but there's a development in town in Milton right now that's still in development. And some of them are listed for rent, but the builder doesn't even allow that. They're during the occupancy period, which is rare. Most builders will allow that now, so I was surprised, but they actually pulled all the listings off. - Oh, wow. - Yeah, so they were pretty strict about it. - Yeah, because that's a whole, maybe that's a good topic. What is occupancy versus closing on a condo? - Yeah, but can these people even assign it? Right? That's why you're talking about reading the contract. - Okay, let me bang through the list and we'll go back. - It doesn't have to be an order. - Okay, fine. So, all right, well, let's talk about that. - Well, as it relates to you saying read the contract. - Yeah. - You may not even be able to buy this place. They may not be allowed to sell it. And if they are, there's no-- - What costs are not-- - What are the costs, yeah. - Can you assign it and what are the costs? And then as the buyer, you'll wanna know who is paying for all of the costs associated with it. So there's an assignment fee. There are legal fees because now there's a new contractual obligation involved and the builder now has to have a new contract with the new buyer, essentially. And the, there is potential of other fees. I won't mention any names, but-- - I was just gonna think we're thinking about the same thing. - Probably, there is a person-- - That we know. - That we know. - We'll leave it at that. - We'll leave it at that. Purchase the property, sold it as an assignment a year later. - And this was a freehold townhouse, something like that? Or was it condo? - I can't remember if it was a freehold townhouse or a condo town. - I think it was freehold. - I think so as well. In Cambridge. - Yeah, not that it's that relevant, but then it does apply across the spectrum-- - We were thinking about the same-- - All types of properties, so not just condos. - So anyways, contractually, they were able to assign it. But when it actually got sold and the builder saw what it sold for. - That's what I was gonna ask. I knew there was a change in something. - They jacked up the assignment fee. - Significantly, like 4X. - Yeah. I don't know, sometimes people do crazy things. - Well, on that note, it's when you're buying, if you're buying, this does, I would say apply more so to pre-construction, but it could be anything. Having a lawyer read the contract might not be a bad idea 'cause sometimes you can alter those contracts to put caps. - I would say it's a must. - Absolutely. - So when your realtor is putting together the offer, put a condition in there that the offer is subject to the lawyer review for, put it for a few days, give the lawyer some time. And that will help you also understand what other costs might be involved. And then making sure that it's itemized as to what costs are involved and who is responsible and when. So things like hydroenergization, tree planting, key fobs, like who knows. - Yeah, and these are all things that someone buying an assignment may not take into consideration. - On the financial side, the other consideration is, and I've talked to a couple of our mortgage brokers, the lending side of things. So if you're a buyer looking to purchase an assignment and now you need a mortgage for it, it can get tricky. It can get tricky finding somebody to lend you that money, trickier, we'll say. Finding a lender to fund something that isn't even built potentially yet. - Yeah. So you just wanna make sure that you're crossing your T's and dotting your I's from a legal standpoint and a financial standpoint. Those are two huge components. - I'd say one of the other benefits to an assignment sale is potentially, although you could still get this elsewhere, but you're getting new construction. Well, this is again, I'm referring to new construction assignment. You get new construction potentially with a quick closing. Or as the, in many cases, like the people you're buying from purchased two, three years in advance with the hopes of closing in the future, you may be able to see the product now built and ready to go so you can even walk in and see it and make sure it's something you're happy with where everyone else just bought it on spec based on floor plans. - Yeah, I mean, I could sit here and debate timing or how timing might affect it because if a buyer comes to me and says, "Hey Ariel, I'm looking at these assignments." There's lots of them available on this Facebook pages and all kinds of places that you see people talking about are just word of mouth, right? And I always question or have the discussion with that potential buyer. Is it worth buying the assignment? Or is it worth buying a resale property? You have to do that essentially a market analysis to see what the value is and the future value might be. So you are taking, if it doesn't close quickly, if it's closing or you're getting occupancy quote unquote in six months or a year or two years or three years, how do you know what the market's gonna be in two years? So just like the original holder of that contract didn't forecast that they would have to sell it in two years, what's your financial position gonna be in two years? What's the market gonna be like in two years? So you are still taking a risk if it's further out. The other thing to keep in mind, one tip here is to do your due diligence on the developer because sometimes people get together that they say, "Oh, we're gonna build a condo here." And they start selling it and they don't even have any approvals, they don't have any permits, they literally have nothing but a piece of land, sometimes they don't even own the land themselves, it's marketing. So did you buy into fluff? Did you buy into a builder that isn't as reputable or reliable? - There's a development in Milton that's closing now, people are taking occupancy and when it originally sold, it was quite a popular release in Milton 'cause it was the first, one of the first time. - Yeah, it's the connect building that's dairy and 25. - Yeah, and to my understanding, they ended up basically refunding everybody 'cause the development was bought out by another developer who took over. - Yeah. - So, I don't know how long those original buyers had their money sitting with that developer earning a zero interest most likely, only to find out that the development was gonna be canceled and then taken over by somebody else. - All right, the last thing I wanted to talk about is the costs but pertaining to the deposit. So essentially, in the agreement somehow, you have to figure out what the difference between the original purchase price and the current purchase price is because you may owe, so let's just say the reverse happens as an example. So the original buyer bought it for 400 and they put 20% down in deposits, so now their balance is 320, but you're buying it for 500. Well, you now owe that buyer, the original buyer, 180 grand, you will not get financing for that deposit. So on a $500,000 purchase, that's what, 33%. So, that's a big chunk of money that's coming out of your pocket cash. So when I say doing a market analysis and all that, it's also looking at how much money you gotta take out of your pocket to actually close on this deal, because on a resale home, you might be out of pocket much less. You don't have the same closing costs. You can purchase an investment property and put 20% down. So that's something definitely to consider. The legal fees, both for your lawyer as a buyer, but also there might be legal fees associated with the builder in the actual assignment, like administrative or whatever they title it, there's gonna be fees in addition to the assignment fee. Correct. Then you also still have your land transfer tax at closing. So now the original buyer gets away with not having to pay that because it hasn't closed. And then you also wanna know who's responsible for the HST. Where does the HST come into play? If the original buyer was an investor and you're an investor, chances are, you will have to pay HST on the original purchase price. So definitely some things that you wanna be aware of. If you are thinking of buying an assignment or wanna know more about it, you definitely need to take time and have a proper consultation with a realtor that knows what they're doing, knows how to look through these contracts and knows where to find these assignment sales to your point. And I would say all in all, it's not a bad time to consider. I've never really been in now 14 years in the industry. I've never really been a big assignment type of person. I've done some of them. I've never really been a new construction fan, period, but I see right over the course of the last decade. I mean, I've never been a new construction fan. I just haven't, I've always much favored resale, personally. I've done new construction myself. I would never do it again. I would only do resale. Yeah, there's pros and cons to both sides. Yeah, I agree. But I think historically, over the course of the last decade. Actually, sorry to interrupt you. I'll let you continue, but teary on warranties and having a new property is definitely an advantage of buying an assignment sale 'cause now you're getting something that you don't have to spend money on, in terms of maintenance and repair. Don't have to have the place painted. Don't have to replace flooring. Don't have to worry about the windows, the roofs. A lot of that still. The paint they use is garbage. Ah, come on, if you're renting it. I'd still paint it 'cause you can't, or maybe go one tenant without painting it, and then paint it, because you can't clean that paint. Okay, what were you gonna say? I stopped your trade off. I was just gonna say that over the course of the last decade or so, assignments have always more or less been in favor of the original buyer, and they were assigning it because they wanted to make some quick cash, whereas now the tables have turned and there's an opportunity, potentially, for buyers of assignment sales, but you definitely, I'd say there's never been a time where you shouldn't be more cautious and careful in understanding what you're getting into. Yeah, as good of an opportunity as it is at this moment, that can shift at any time. And I'm still gonna say I would be favorable much to your comment. I still would be favorable towards a resale property, something that's proven, something that's there, it's tangible, you know what you're getting into, and if it's an investment property, you're closing on it in 60, 90 days. You can advertise it ahead of time for rent, potentially. So you get it earning income much, much quicker. And yeah, funny story, not a funny story. Funny story, not a funny story, but fun fact. Back in, we've seen it probably twice in the past 13, 14 years. I wanna say 22 and then 17. Okay, 2017 and 2022. Because we're talking about assignment sales. In those two, there were two huge peaks in those years in the market. And during those waves up, there were realtors that were buying resale properties and assigning them because the market was taking up or taking off. So what was happening, you know, realtor would find a deal. Let's say it was a townhouse for a million bucks, but based on the way the market was going and knowing that in the next four weeks, this home is gonna be worth 10% more, just because of lack of supply and high demand and multiple offers and people going crazy. So they would take the risk, buy it for a million with the right to assign it before closing and then advertise that within their network and find somebody to essentially just hand them a check for 80 grand, 60 grand, 100 grand, whatever, to just assign that contract. Risky business though, because-- Very. It can go both ways. Well, yeah, to make that kind of money that the two instances you're referring to, they were very short lived. Yeah. It's interesting, 'cause both of them had a downward turn around the same time of year. Yes. So which one was a little bit earlier than the other, but in 2017, I think it was more like April-ish or something like that. Yeah, I can recall, but some of it-- 22 was a little bit earlier end of February, early March. We started to see it. Early February, yeah. Yeah. So anyways, just be careful at that time of year and you're looking at assignment sales. Yeah. If you have any comments, we'd love to hear your questions, if you have any experience or history revolving around buying an assignment. Let us know. And then join us next week. Well, sellers will talk a little bit more on this topic, but focus more on sellers. Sure. There you have it. Hopefully, the information we gave you today will help you in either purchasing an assignment seller, making the decision about whether it's the right decision or not for you. And if you need any more help with buying, whether it's resale or assignment or new construction, there's a link in the description of this video to visit our website and you can contact us anytime for more help.