Tuesday Oct 31st, 2023
For years, we’ve been having conversations with people who are looking for a “real estate deal”, to which the response has always been, there’s no such thing! Save for a blip in market prices for a couple of months at the end of 2008 (due to the financial crisis in the United States), a few months in 2017 (introduction of the Ontario Fair Housing Plan) and shortly during the start of the pandemic in 2020, we haven’t seen market prices dip to the point where buyers were able to take advantage and buy at much lower prices. However, there is one segment of the market where we are seeing “deals” consistently right now – the assignment market. (If you are unfamiliar with how assignments work, read more here
Consider an example of an investor/speculator who bought something pre-construction back in 2018. Let’s call this buyer Gary……Gary was lucky enough to secure a contract on a condo unit, after lining up outside a sales office for hours and hours. After submitting the necessary deposit, Gary knew that as the project sold out, as phase 2 and 3 of the project was launched and sold out, as construction started, and as time to completion was nearing, every milestone would help to increase the value of this contract that he held, to close on a unit. It also helped that the re-sale market for condos was also soaring, helping his new condo appreciate.
Once his unit was getting close to completion, Gary could sell his contract via assignment, and pocket the “profit” between what he paid for back in 2018, earned by his ability to get in on the project in the first place (which was not easy back then), front the money for the deposit, and assume the risk of buying pre-construction. Alternatively, Gary could take interim occupancy, rent out the unit to a tenant, and take title to the property by remitting the closing costs and land transfer tax, getting approved for a mortgage, and becoming a landlord.
Now imagine that it is 2023 when the project is near completion. Gary realizes that he no longer qualifies for a mortgage at today’s interest rates. He also doesn’t have the money for the closing costs and land transfer tax (which could amount to approx. $35,000 on his 1-bedroom purchase), as well as the last installment of the deposit/downpayment, due on closing. As an investor, he also has to remit the HST, although he does qualify for a rebate. Gary isn’t able to get the financing and he doesn’t have the necessary cash to complete the purchase.
In an effort to avoid being pursued legally by the builder, losing his deposit and possibly being responsible for the deficit should the builder have to sell the unit at a loss, Gary tries to assign his contract to a buyer who is able to finance the purchase and remit the balance of the deposit, closing costs, HST, and land transfer tax. However, the market has softened significantly. In previous years, people clamoring at the opportunity to buy into a sold-out project, with minimal risk as the unit is near completion, would be jumping all of this. Now, there is less appetite for those willing to pay a premium for “new”, obtaining financing is more of a challenge, and buyers are waiting on the sidelines to see if market prices are going to decline in the coming months. No one is biting on this opportunity.
As market prices in general have increased quite a bit since he bought in 2018, Gary tries to assign his unit at a price based on recent sales of comparable units, which is more than his original contract is for. Perhaps he considers a slight discount for the additional cash outlay the buyer will need to make, with the additional closing costs owed to the builder. However, as time creeps closer to the completion date, little or no interest in the unit has Gary panicking. He lowers his price, to the point where he’s merely asking to recover his deposit, even willing to absorb the cost of the assignment (if approved by the builder) and with anyone willing to take on the closing costs for the unit, the new buyer will have obtained the right to close on this brand new unit, having paid a 2018 pre-construction price in 2023.
This is where we are currently at with the assignment market, and this is where the opportunity lies.
If this sounds like something you would be interested in learning more about, contact us today to be placed on our distressed sellers list, to start receiving notifications of assignment opportunities and more!