Buying a New Build Home by Assignment – Basic Considerations for the Prudent Buyer
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Despite the abundance of residential builder projects across the Greater Toronto Area, whether they be high-rise condominiums or single family residence subdivisions, there is still seemingly greater demand than supply. This is reason in part for the increasingly common “buy by assignment” transaction. In its most simplest form, this “buy by assignment” transaction involves the buyer of a new home under contract with a builder (the “original buyer”) allowing a new buyer (the “new buyer”) to take over that original contract and complete the purchase transaction with the builder. The new buyer gets the home they want under the terms of a contract often signed months or years earlier. What is often lost on the new buyer though, is that they are not purchasing the home from the original buyer but rather they are purchasing the original buyer’s interest in the original contract – in other words they are stepping into the shoes of the original buyer, assuming the liabilities and obligations under the original contract and ultimately completing the transaction with builder.
Here are some basic considerations that new buyer should have before involving themselves in a “buy by assignment” transaction:
- Carefully review the Original Contract: Ask the original buyer for a complete copy of the original contract, along with all amendments, notices, material/colour selections and extras/upgrade order forms. So often I notice that the focus is on the assignment agreement between original buyer and new buyer and the original contract with the builder becomes an afterthought. However, as the new buyer will be assuming the liabilities and obligations in the original contract, the new buyer should take steps to carefully review the terms of the original contract and consult with a lawyer. Although it is unlikely that the terms of this original contract can be further negotiated with the builder, educating oneself on key terms and cost expectations can avoid surprises and headaches later in the transaction.
- Understanding the Payments and Associated Risks: Buying by assignment actually involves two transactions and agreements – firstly the purchase from the builder under the original contract, where ownership of the home will be acquired, and secondly the purchase from the original buyer of their interest in the original contract under an assignment agreement, where the ‘profit’ is paid to the original buyer. While the original contract with the builder will indicate when payment is to be made to the builder (most often on the ‘closing date’ when ownership of the home is transferred), the assignment agreement is often less clear on when the original buyer will be paid their “profit”. Take for example a new buyer who agrees to purchase a new home by assignment for $800,000, this figure in our example being composed of the $600,000 purchase price in the original contract with the builder, and a $200,000 ‘profit’ for the original buyer. Most often the balance of purchase price in the original contract (being the original purchase price less paid deposits) would not be due and payable until the ‘closing date’ of the transaction with the builder, being the date on which the new buyer acquires ownership of the home – this is relatively low risk to the new buyer, because the builder does not get the money until the new buyer gets ownership of the home. However, often the original buyer will want to see their ‘profit’ paid to them, in whole or in part, before the ‘closing date’ of the transaction with the builder - often the ‘profit’ is to be paid upon receipt of the builder’s consent to the assignment transaction. There is obvious risk to the new buyer in making such payments before they actually own the home – if, for example, the builder were to validly terminate the original contract or fail to close that transaction for whatever reason. In such a case, the new buyer would be left trying to claw back the ‘profit’ from the original buyer. To minimize this risk, it is most often my advice to new buyers that the only payment made to the original buyer, before closing of the transaction with the builder, is a reimbursement to the original buyer for deposits paid to the builder. I suggest the ‘profit’ be paid to the original buyer only on the ‘closing date’ of the transaction with the builder.
- Consider your financing arrangements before a deal is struck: If the new buyer requires financing (whether through conventional mortgage and/or secured line of credit) to purchase the home, the new buyer should ensure that the assignment agreement they enter into with the original buyer is conditional in their favour upon them finding satisfactory financing. The new buyer should also ensure that their broker or lender representative is familiar with assignment transactions.
Buying a new build home directly from a builder can be complex in its own right. Buying a new home by assignment adds an additional layer of complexity. The most prudent buyer will seek professional advice before finalizing an agreement to buy by assignment.