Many buyers of new GTA condos looking to cash in on the hot real estate market by flipping their units before the buildings close face an unusual legal situation — the standard purchase and sale contracts don’t apply.
The final closing on the building may come months after people move in. In the meantime you’re trying to sell something that you don’t legally own.
To deal with a growing issue the Ontario Real Estate Association has developed a new form to make the process easier for everyone. It’s called an “assignment agreement” and here’s how it works:
Let’s say you bought a condo from builder’s plans three years ago for $300000. It is now ready for occupancy but closing is six months away. You’ve received an offer for $350000 and want to sell now.
Since you don’t own the unit yet you must sell your interest in the contract that you have with the builder. Your buyer will then be taking your place in the agreement with the builder.
Here are some issues:
Will the builder let you sell your agreement?
They don’t have to but most builders will allow it and charge a fee. Make sure you get permission from the builder before advertising your unit for sale or signing any assignment agreement.
Is the land transfer tax based on $300000 or $350000?
The contract includes the total price the second buyer is paying. So that buyer will have to pay land transfer tax based on the price on $350000. The original buyer will not have to pay any land transfer tax under this scenario.
However the seller — i.e. the original buyer — will have to pay tax on the gain of $50000.
Is the realtor’s commission based on $300000 or $350000?
The agent will expect to be paid on final price of $350000. If you want to negotiate a different amount make sure it is done before signing anything.
What happens to the deposits given to the builder?
The second buyer returns it to the seller. The agreement will provide options about how this is done. They can be returned in several ways: as soon as the assignment agreement is signed on the date of occupancy or just prior to the final closing.
Are there any HST issues?
The HST was probably included in the original builder agreement. Therefore if the new buyer is not moving in he or she may have to pay the HST to the builder on final closing and then apply for a rebate from the Canada Revenue Agency.
The seller may have to charge HST on any profit for instance the $50000 in the above example as well as on any deposits that are being paid back if he or she originally bought the unit as an investment and never intended to move in.
Buyers should take a look at the original purchase agreement to see whether there are any additional adjustments on closing. There are often hidden charges that can sometimes add thousands of dollars to the final sale price. Under the assignment agreement the final buyer must pay all these costs even if they are not aware of them. If as the final buyer you want to change that then an extra clause must be added to the assignment agreement.
If you are thinking of buying an assignment make sure to check with your lender first to make sure that they will approve this kind of deal with the final price.
By understanding all the issues around assignment agreements buyers sellers and real estate agents will be better prepared for what is becoming a more frequent transaction in the industry.
By Mark Weisleder | Fri May 11 2012