I get questions from buyers all the time about buying a home, and then assigning the contract just before completion. This is fine, but people make the assumption that if they are approved, they can assign their approval. This is incorrect. While you can assign almost any contract, except some pre-sale contracts, that says nothing about whether or not the financing will be available to the new assignee who holds the contract rights. Financing does not follow an assignment of a contract.
To explain what an assignment is, and how they work, I’ve done the following video blog. Enjoy!
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TRANSCRIPTION OF THE VIDEO BLOG:
Hey everbody, it’s Rowan Smith from the Mortgage Centre. I want to talk today about assignments: what assigning a contract means, what your obligations are as the assignee and the assignor.
Now, I want to define what an assignment is. Let’s say you purchased a place, or you wrote a contract on a place to buy a home. Maybe the completion date is April 15th or something like that and it is January 13th today. Now, you go and you take time and you arrange your financing, you get everything in place, you remove subjects, you get all of that done and then what happens? You get transferred in your job. You can’t back out of that contract at that point. You have entered into it. It’s binding. You’ve removed subjects. You still have to complete even though you’re being transferred to another province. You can either rent the place out or you can try and sell it on assignment.
Now, what that means is that you’re going to try and sell the rights to that contract. A lot of people used to use these to make money in the late 90’s and early 2000 and onwards. The way they would do it is they would buy a pre-sale. So, maybe the place is going built in, you know, 2 years down the road, and the person would write the contract today. They would get into it with a small deposit, and then they would go and they would have to wait two years until the property would be completed. Now, during that time, of course the market was rising and rising and rising. By the time they had to complete they had only had to put a very small percentage down.
So, their options were to complete and buy the place for that value, or their option was to sell it on assignment and ask for some “lift.” Lift is the value that has resulted from the market prices rising when you contracted to buy the place here <gestures low> and the developer is stuck with your price here, and then two years later, you are selling it for this amount <gestures much higher> before you actually complete. So, someone is buying that contract from you and if the value of the home has gone up $100,000 you could get $100,000 up front based on selling your assignment.
However, some banks don’t allow assignments. So when it comes to financing, you have got to be careful. The other thing is, going back to my example of a home that is going to close in April, if you were to sell that home chances are there isn’t going to be a material difference in the value of the home at the end of only a couple of months. So you’d be lucky to get your actual purchase price. If you were buying it for, say, $400,000 you would probably only get (I’m grabbing numbers out of the air here) $390,000 or $385,000. Something like that (this is because you are being forced to sell quickly due to the transfer). So, you may still be out money.
If you are fortunate, someone will buy the contract off you for the same amount that you were going to be paying for it. Therefore it would be a wash. Rarely does life work out that well, however. So, I’ve had some inquiries on assignments and a couple of things have come up that have lead me to see there are some misunderstandings regarding these topics.
When you do an assignment, when you try and sell the contract, you are not selling your financing. So if you have gone and arranged a mortgage and it is totally done, and you are completely approved to buy a home – you are completely approved to buy THIS home on THIS date for THIS price – you turn around because you got transferred and I want to sell the right to buy that home to somebody and just try and break even and get my money back, I CAN DO SO.
That person (the buyer of the contract on assignment) has to arrange their own financing, and how they do so is entirely up to them. They may not even need financing. Maybe they are a cash buyer and are going to pay for the contract outright.
The important lesson here is that you cannot assign your financing prior to completion. You’re only assigning the contract, so it’s very important to make that distinction.
Thanks again for watching!