Assignment sales allow the original purchaser of a pre-construction home to sell their purchase contract to someone else before the home is completed. However, there are important assignment sales rules in Ontario that both sellers and buyers must know. These rules are the fine print that can make or break your assignment sale. In this blog post, we break down these critical rules. They range from mandatory builder approval to hidden fees you need to know about to avoid costly surprises.
Assignment Sales Rules: Builder Approval is Mandatory
One of the most important assignment sales rules is that you usually need the builder’s permission to assign your contract. Pre-construction purchase agreements typically include an assignment clause. This clause outlines if and how you can sell the contract. In Ontario, most builders do allow assignments. However, builder approval is almost always required. This means you must apply for consent from the developer before you can officially transfer your agreement to a new buyer.
The builder will review and approve the new buyer (the assignee). They need to ensure the assignee is qualified to take over the contract. If you try to sell without the builder’s written consent, you risk breaching your agreement. The builder could cancel the sale. Always check your purchase agreement’s fine print to confirm if assignments are permitted. Note what conditions apply if an assignment is allowed.
Assignment Sales Rules: Fees and Other Costs
Another key part of the assignment sales rules to watch for is the assignment fee. Builders don’t grant approval for free – they charge a fee for allowing the assignment. Assignment fees in Ontario can range widely (for example, anywhere from a few hundred to several thousand dollars). Be prepared to pay this fee to the builder as the original buyer. In addition to the builder’s fee, consider other costs:
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Real Estate Commission: If you use a real estate agent to find a buyer for your assignment, you may owe commission just like a normal sale.
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Legal Fees: Assignments require extra paperwork, so your lawyer may charge higher fees than for a regular resale.
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Taxes: Don’t forget government costs. The profit you make from an assignment isn’t “free money” – it’s subject to taxes. In fact, any profit from an assignment sale is generally taxable income. In 2022, a new rule came into effect. HST (13% sales tax) must be collected on any profit from assigning a new home. Meanwhile, the new buyer will be responsible for paying land transfer tax when they eventually close on the property.
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Potential Builder Admin Costs: Some builders may also charge an administrative or legal review fee on top of the assignment fee.
All these costs mean you should budget carefully before deciding to do an assignment sale. Calculate the assignment fee, commissions, legal bills, and any taxes on profit. Then determine if an assignment sale still makes financial sense after accounting for these costs.
Other Important Assignment Sales Rules
Besides builder approval and fees, there are other critical assignment sales rules in Ontario you need to follow. Here are a few must-know rules written in the fine print of many contracts:
No Public Advertising:
Most builders do not allow marketing the assignment on MLS or public websites. Even though you have the right to assign, your contract may forbid listing the unit for sale publicly. This rule can make finding a buyer challenging. You must rely on private networks or agents who specialize in assignments. Importantly, if you break this assignment sales rule, the builder can consider it a breach of contract. They can cancel your purchase agreement and keep your deposit. Always stick to the marketing rules in your contract.
Timing Restrictions:
Pay attention to when you are allowed to assign. Some builders only let you assign after the project is a certain percent sold. Others allow assignment only after a specific date. Others may not allow assignments at all until the building is nearly complete. Every project is different. Always confirm the timing rules set by the developer. Missing the permitted window could mean you lose the chance to assign.
One Assignment Only:
Many agreements stipulate that you can only assign the contract once. In other words, an assignment can’t be assigned again. This assignment sales rule prevents multiple flips of the contract. You typically have only a single opportunity to assign.
Tax and Legal Obligations:
We mentioned taxes earlier, but it’s worth repeating. Any profit from an assignment sale will likely be taxed. It might be treated as capital gains or business income, depending on the circumstances. Also, HST will apply to the profit for new construction assignments. Always consult an accountant so you don’t get surprised by a tax bill.
Also, use a lawyer who is experienced in assignment sales. They can draft and review the assignment agreement. Ontario assignment sales actually involve two transactions. The first transaction is between the original buyer and the new buyer. The second transaction occurs when the new buyer closes with the builder. This complexity means you should have a good real estate lawyer to help you.
Conclusion
Navigating assignment sales rules in Ontario’s real estate market doesn’t have to be scary. The key is to read the fine print and understand your obligations. Always secure the builder’s approval. Budget for assignment fees and other costs. Follow all the rules outlined in your contract. By doing so, you can successfully sell your pre-construction contract. At the same time, you’ll avoid legal pitfalls and last-minute surprises. If you are considering an assignment sale, make sure you understand all assignment sales rules. This knowledge will help protect your investment and ensure a smooth sale. Assignment sales can be a smart strategy with the right knowledge and professional guidance. This is especially true in Ontario’s pre-construction housing market.
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