What kind of person would sell you a newly built home for less than fair value, and give you free cash to boot? The kind of person who can’t qualify for a mortgage on that property and is about to lose all their deposit – and potentially be sued.
It’s happening as we speak. With borrowing costs near multidecade highs, most lenders require borrowers to prove they can afford payments at rates above 8 per cent. That makes it too hard for some to get final approval for regular financing, even if they already had a preapproval.
This week’s lowest fixed and variable mortgage rates in Canada
In other cases, buyers have got divorced, lost income, racked up too much debt or lack enough provable self-employed earnings. Or their new-build no longer appraises for a high-enough value to get fully financed, and they have limited down payment funds.
As a result, a small but growing number of preconstruction buyers are compelled to sell – assign – their contracts to others before their home is completed. And they’re sometimes selling for whatever they can get, to recoup get some of their deposit and reduce legal risk to the builder.
Potential opportunities
With interest rates so high, mortgage qualifications so tough and sales in the doldrums, it’s become a lot harder to pawn off preconstruction condo units. But longer term, real estate demand should remain solid.
That’s partly why some real estate experts think it may soon be time to go bottom fishing for assignment deals.
“There may be opportunities in distressed assignments next year,” said Ben Rabidoux, an analyst at Edge Realty Analytics, in a recent subscriber call. “You’re starting to see some pretty wild assignments coming online – people effectively giving up their deposits, selling for 2019 pricing.”
Mr. Rabidoux adds that people who bought four to five years ago are having an easier time assigning their properties. Folks who bought more recently probably overpaid relative to current values, and may be more desperate.
Whether an assignment is a good deal depends partly on the vintage of the contract. “Given how much lower prices were, in some cases paying a 5 or 10 per cent premium on a 2018 vintage may be a better deal than buying a 2021 assignment and gaining half the buyer’s deposit,” says assignment expert Jordon Scrinko, managing partner at Toronto-based Precondo.
“Most assignments cannot be listed on MLS, so aggressive pricing is the most common way to market them.” Prices are most favourable for quick closes where there’s not enough time to market the property and the assignor is distressed.
You can find assignments in places such as BrokerPocket – a site for realtors – Kijiji and Facebook groups. But “the best way to find a deal is to speak to brokers who deal in high volumes of assignments so you can get floated those opportunities before they get posted in public,” Mr. Scrinko says. “Realtors hop on these deals themselves all the time.”
Timing matters
If mortgage rates fall as expected in 2024, and depending on where a property is located, that may be a more favourable market to sell into. There are no guarantees, but there is latent demand from new Canadians and sidelined buyers. That and historical precedent suggests falling rates could meaningfully juice home prices once inflation falls back into the 2 per cent range.
That’s especially true if rates drop during the normally hot spring market.
That said, if listings keep growing and unemployment shoots up as expected, average sale prices may get worse before they get better.
Tips for assignors and assignees
- Before dumping your contract in a fire sale, contact a tax-savvy accountant to see whether it makes sense to close on the property and then flip it, or lease it out at record-high rents. If you want to rent it out or flip it and can safely carry the property’s monthly expenses and closing costs, contact a mortgage broker to scout out financing options.
- It sometimes makes sense to temporarily get a one-year term mortgage with a higher-cost, non-prime lender, just so you can close. When rates drop, you can refinance to save money, assuming you still have the property.
- If you’re a would-be assignor or assignee and can’t qualify for a single mortgage – for example, at the typical 80 per cent of the purchase price – a mortgage broker may be able to qualify you for a cheaper 65 per cent first mortgage plus a 15 per cent second one. The additional mortgage will have a more painful rate, but at least it’ll let you close.
- If you assign your contract to someone who doesn’t close, you’re typically still on the hook with the builder.
- Assignment deals are infinitely negotiable. “If the original buyer paid $1-million and you pay $1.1, you owe them $300,000 – the deposits plus their $100,000 profit,” Mr. Scrinko says. “You might do $50,000 installments over time, or you might do a 5 per cent deposit with the offer plus the balance of deposits upon closing.”
- Beware that the builder may require a satisfactory mortgage preapproval before it allows an assignment.
Taxes and fees aren’t cheap
The single most important tip for anyone unsure about whether they can close on a new construction home is: Start evaluating your options early. If you wait until a month before closing, it may well cost you.
- Assignments require builder approval, and often a fee. “Lately, developers have been offering free assignments or reduced assignment fees,” Mr. Scrinko says, but not all. Builder assignment fees tend to be harsher on freehold homes than on condos.
- Be aware of Canada’s anti-flipping rules, which levy full tax on gains from properties owned for less than 12 months, unless the sale is due to a life event such as divorce or job loss. Also, if an individual flipper incurs losses, Canada Revenue Agency prevents those from being claimed against regular income on their tax return.
- Assignors must generally collect and remit GST/HST on their assignment sale.
- Have a good real estate lawyer check your contractual obligations. One hidden gotcha is large development charges which can be $30,000 or more on a one-bedroom condo in Toronto. Uncapped development charges can sometimes apply if a purchase contract is assigned, whereas developers often cover most of the cost if the original purchaser closes, Mr. Scrinko says.
Stress Test: The struggle is real: how homeowners are coping with soaring mortgage rates
Mortgage rates dip as bonds tease four-month lows
Fixed mortgage rates continue deflating as bond yields continue to teeter near four-month lows.
Leading nationally advertised rates dropped on half the fixed terms I track this week, by an average of eight basis points. (A basis point is 1/100th of a percentage point.)
Variable rates are playing it cool. The best deals haven’t budged for four months. And they probably won’t until unemployment is well into the 6 per cent range and inflation is comfortably below 3 per cent.
Speaking of variables, they’re grabbing a bigger slice of mortgage market share. I suspect they’ll be the belle of the ball once the Bank of Canada swings the rate-cutting axe in 2024.
Rates were sourced from the MortgageLogic.news Canadian Mortgage Rate Survey on November 23, 2023. We include only providers who advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment or switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1 million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
In it's mini-budget, the federal government pledged to cap future deficits against which guidepost?
- 1 per cent of the GDP
- Goal differential of the prior season’s Ottawa Senators team
- None. They pledged to cut the deficit to zero
- None. They pledged to increase future deficits
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
Robert McLister