I’m going to start by giving some background information, but if you prefer, scroll down to the advice piece below.
Assignments: Flipping for Profit
One of the elements driving the very strong market in the past few years was speculation, buying real estate to flip at a profit in the short term. Assigning contracts, especially pre-sale contracts on projects not yet built, was a way to earn profits from short-term increases in prices.
A contract Assignment is where 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 the past, if a Buyer ‘flipped’ the contract to a new Buyer at a higher price, there was no requirement to pay the original Seller any of that profit.
Government intervention to slow the market:
In 2016, the government introduced two changes to contract Assignment rules:
- this contract must not be assigned without the written consent of the Seller; and
- the Seller is entitled to any profit resulting from an Assignment of the contract by the Buyer or any subsequent assignee.
As you may have read in the papers, more vulnerable groups like seniors, were sometimes convinced to sell lower than the price they could have really got for the property. Then, the Buyer would turn around and re-sell it for higher, literally within days.
Developers get richer:
The ability to assign has always been a normal part of contract law, mostly as a protection for Buyers: what if you don’t have the money to close? Selling the contract to someone else saves a Buyer from defaulting on the contract – with big consequences – more on that below.
However, one of the unintended results of the change was to transfer profits away from all Buyers, not just wealthy speculators.
Since a lot of these Assignments were happening with pre-sales where the original contract was with the Developer of the project, the Developer was now getting a cut of that increased value. The Developer could choose whether to consent, and could require a fee to agree to the Assignment.
Some of those fees were as high as 10% of the total purchase price of the property – so, if you bought a property for $800,000, you’d have to pay the Developer $80,000 to agree to assign the contract. Along with legal and realtor fees to assign to the new party, that property would have to have to be sold at a huge increase to cover those costs. So, prices were driven up.
Anecdotally, there were also stories where a Developer would withhold consent on the chance that the Buyer wouldn’t be able to close, and the purchased unit would revert back to the Developer to re-sell at an even bigger profit.
So, the intervention on Assignments hasn’t exactly worked out as planned, but between the regulatory changes and other factors that have slowed the market, Assignments are way down. However, Assignment is still an important strategy that will resurge in stronger markets, albeit with some risks, and there are a ton of Assignments out there, still to be completed. So, what do Buyers need to know?
Critical Advice for Buyers:
I have a few pieces of critical advice for Buyers who either:
a) want to buy a property in the hope of assigning the contract later, or:
b) already have assigned a property
- This strategy only works in a rapidly increasing market, and as we’re seeing right now, markets can turn on a dime
- For your own protection, never buy a pre-sale unit without using your own Realtor – the Realtor who sits at the project works for the Developer, not the Buyer! It’s critical that you get representation and an explanation of the contract. The Seller pays the fee that covers both realtors, so why say no to free advice?
- Never enter into a contract to buy a property unless you know you can close the deal – whether you plan to assign or not. What will happen if property values drop or financing rules change (as they have over the past year) – what is your Plan B?
- A contract is a contract – once it’s firm, it’s fully enforceable. So, even if you’ve assigned the contract to a new Buyer, you’re not off the hook. The Developer still has an enforceable contract with the first Buyer. If the new Buyer can’t close, the Developer will come back to the first Buyer, who will need to close or forfeit the deposit that he or she worked so hard to save!
- Even worse, a Seller (that generally includes Developers, as well as homeowners selling their property), can also sue a Buyer who didn’t close the deal. So, not only does the Buyer lose their deposit, but they could be on the hook for the difference between the original sale price, and the lower price that the Seller received when they sold to the next Buyer in a falling market - or any other damages the Seller may have incurred as a result. These amounts can easily be in the hundreds of thousands of dollars.
- If you do assign a contract, make sure you have protections in place and have satisfied yourself that the next Buyer has the financial wherewithal to close the deal – if you can, get your deposit paid back and the lift (the increase in value) paid up front to give yourself a cushion in case things go sideways.
- Never, ever under any circumstances assign a contract without involving an experienced real estate lawyer! Here’s an example (not my deal, I promise) where things went drastically wrong:
o Buyer ‘B’ then assigned their contract on a pre-build project to a third Buyer (let’s call them ‘C’) for another $100,000 more than the original purchase price. So, Buyer ‘C’ should have been under contract to pay $200,000 over and above the original sale price - $100,000 to ‘A’, and $100,000 to ‘B’.
o Unfortunately, when it came time to close, ‘C’s lawyer noticed that the paperwork hadn’t been drawn up properly, and there was actually no contractual requirement for ‘C’ to pay the first $100,000 increase. ‘C’ chose not to pay it (never assume people will do ‘the right thing’, even when they know what the intent was, when money is at stake).
o So, ‘B’ was on the hook to pay that $100,000 back to ‘A’, when they weren’t even the ultimate Buyer of the property – a big hit, caused by mistakes in paperwork.
What to do if you’re already in trouble:
When we look around Squamish, there are a huge number of pre-sale units that are well on their way to completion. You can bet that some of these units have been assigned, and some where (assigned or not) Buyers will struggle to close under very different conditions than when they signed the contract. What should they do?
1) Consult one of the excellent real estate Lawyers here in town to assess options – please contact me for recommendations.
2) Speak to one of the many excellent Mortgage Brokers that we have here in town – please contact me for recommendations. Although conventional lenders have stepped back, non-conventional lenders may have some creative solutions. If there is a way, a mortgage broker can help you find it.
3) Seek out all available means to close the deal – family and friends may be willing to help with loans, or join you as a co-buyer – these options aren’t without complications, so consider the pros and cons.
4) Even a higher rate in the short term may be well worth it to buy time until stronger market conditions return, and you can re-finance or sell
5) If you’re trying to unload a property via Assignment before close, consider reducing your price or offering additional incentives for realtors on a firm deal within a specified time limit – you may be able to break even or reduce the loss if you’re going to be forced into that position
Don’t panic – the Vancouver Lower Mainland and surrounding areas are consistently attractive destinations and strong real estate markets. Things will come back, and likely in less time than we think. In the meantime, if I can help with advice or real estate services, please contact me.
Follow my blog at www.carriechase.com and please like and share my professional Facebook site, https://www.facebook.com/CarrieChaseRealEstateSquamish/