Pre Assignment Definition In Real Estate

With the strength of the preconstruction market over the past decade, many have chosen to reap the benefits by purchasing property on plan from a builder and subsequently selling the rights to the property, with a markup, to another buyer before closing. Selling a construction property prior to closing is formally known as an assignment of a property. Not all assignments are done strictly for profit; there are situations that may arise requiring a purchaser to assign a property originally intended to be a principal residence. Most builders allow assignments to be done at little to no charge. However, it’s important for anybody considering assigning a property to be aware of the nuances involved. In particular, what are the potential HST implications on the sale of the right? How should any potential markup earned on an assignment be reported; as a capital gain or business income? The latter will be discussed in the second of this two-part blog; here I will first discuss HST considerations.

To answer the HST question, it will depend on the determination of the primary purpose of the property from the point-of-view of the CRA. Namely, was the property purchased with the intent of reselling at a markup, or was it originally purchased as a primary residence only to have extenuating circumstances require the assignment? If the intended purpose of the property is concluded to have been to resell for profit, the CRA could define the assignor of said property as a “builder” for HST purposes, even if the assignor is simply a buyer and not actively involved in the construction process. Furthermore, if the assignor is ultimately deemed a builder by the CRA, they are subsequently required to charge and remit HST on the markup earned from the assignment. The CRA will take various factors into consideration in ascertaining the intended purpose of a property and whether the title of “builder” should be transferred to an assignor. Some of the primary factors considered by the CRA can be found in the GST info sheet GI-120 here.

They include, but aren’t limited to:

  • The person offers to sell his/her interest in the property or explores other avenues to sell the property before or while the house is under construction.
  • The financing of the property indicates that it’s for short-term usage. The mortgage is short-term and could be paid off without penalties rather than a long-term or closed mortgage.
  • The financing of the property is unreasonable for the person given their income level, making it appear that the person is relying on the increased value of the property to resell the house.
  • The person’s stated interest is to occupy the property as their primary residence, but their personal circumstances make such a claim appear dubious.
  • It appears that, based on the person’s pattern of activity, their occupancy of the property does not have the characteristics of a permanent one.

There are other considerations as described in GST/HST Memorandum 19.2 that can be used to determine if an assignor may be considered a builder, but those summarized above are most commonly used to identify a builder. Allow me to illuminate the point with a couple of examples.

Example 1

Bob and Natasha own a 3-bedroom house where they live with their two children. In May 2010, they entered into a purchase and sale agreement with a builder to buy a single bedroom condo. The purchase price was $310,000 with a closing date in November 2011. In June 2011, while the property was still under construction, they assigned the right to their property for $350,000.

Point four listed above may be used to determine that Bob and Natasha be deemed builders in this case and be forced to charge HST on any markup earned from their assignment of the one bedroom condo. Even if they have no prior history of buying and selling real estate, it would not have made sense for a family of four to leave a 3-bedroom dwelling in favour of a one bedroom condo. Based on the available information, it appears likely that their primary purpose in acquiring and selling the property before closing was to sell the condo unit at a profit.

Example 2

Nelson and Eva rent a 3-bedroom house where they live with their two children in Toronto. After learning that Eva is pregnant with their third child, they felt their rented unit was too small to accommodate their burgeoning family. They enter into a purchase and sale agreement with a builder in February of 2012 to buy a new 4-bedroom house, set to be completed in May of 2013 for $450,000.
In January 2013, Nelson was promoted with a substantial raise and his new position required him to move to Ottawa. As a result, the family assigned the 4-bedroom property for $500,000. In Ottawa they purchased a 4-bedroom property to live in.

In this instance, it’s clear that the assignment of the right to the property was a result of work relocation and that the primary purpose was not to resell interest of the house for profit. Nelson and Eva would likely not be considered builders in this case and thus would not be required to charge HST.

In the event that a buyer was deemed a builder by the CRA, what would this entail? Using the numbers in example 1, the property was purchased for $310,000 and assigned for $350,000. The assignor would have to assign the property for the extra $40,000 in gain plus 13% HST ($5,200). Assignors often fail to charge additional HST, thus rendering the $40,000 profit as being inclusive of HST, requiring the lawyer to remit an HST amount of $4,600 to the CRA, cutting the take-home profit to $35,400.

From the point of view of the assignee, they would then be eligible to benefit from the HST rebate on a newly constructed property on the extra $4,600 remitted. Generally, the HST rebate is applied for by the builder on behalf of the buyer and factored into the final price. Thus, the original $310,000 price paid by the assignor when the price was first agreed upon with the builder had already factored in the rebate due to be received after closing. Here’s the breakdown of the original $310,000 purchase price:

The breakdown of a $310,000 purchase price in Ontario is as follows:

$294,677 Actual price
+$14,734 GST (5%)
+$23,574 PT (8%)
-$5,304 (GST rebate: 36% of GST)
-$17,681 (PT rebate: 75% of PT)

Had the builder not factored in the rebate, the original purchase price would have been $22,985 higher. Since the CRA only allows one HST claimant on the property, it is in the best interest of the assignee to pay the total price of the property, inclusive of all tax, and then apply for the full rebate themselves. Thus, the purchase price for the assignee would total $372,985 ($350,000+$22,985 original rebate). Not only would the assignee receive the $22,985 original rebate back, they would also get an additional rebate of $2,761 due from the extra $4,600 HST paid on the $40,000 markup. The breakdown of this additional rebate is as follows:

The GST of $1,770 yields a rebate amount of $637 (36%)
The PT of $2,832 yields a rebate amount of $2,124 (75%)
Thus, the extra $4,600 HST would yield a refund of $2,761, resulting in a final price to the assignee of $347,239.

The rebates available on the federal and provincial portion of the HST are not always straightforward. If you are unfamiliar with the calculation of an HST rebate on newly constructed properties, like the one demonstrated above, I invite you to read my HST rebate blog here.

Watch for part 2 of this article where I will discuss the effects on income tax for an assignor.

Disclaimer: The information contained herein is not meant to be professional advice but for educational purposes only. You should consult with your accountant when handling such matters.

 

If you’re new to real estate investing, there is a term called “contract assignment.” If you have not come across this term or you are unsure of the intricate parts of contract assignment, I am going to spell it out. If need be, re-read this article again and again. Also do not be afraid to ask questions in the comment section below.

We are in the prime selling season in most markets. During this time, investors are normally busy trying to lock down as many properties as possible. In our market, Phoenix, we are seeing an influx of buyers looking for deals. I recently had a conversation with a group of investors looking to get their hands on almost anything that will generate a profit. It would seem that we have not learned from the previous market crash how the real estate climate can change in an instance. My philosophy is ride the storm and assign as many real estate deals as possible.

If you have sat through any get-rich-quick guru pitches, the majority of them will introduce contract assignment wholesaling, but without giving you all the steps involved. Here is what they are referring to when they say “make $5,000 in the next 60-90 days.”

How to Analyze a Real Estate Deal

Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.

Click Here For Your Free eBook

What is a Contract Assignment?

Short and simple. This is when you first find a property a seller is willing to sell significantly below market value. You then resell that property to another buyer, normally a real estate investor, at a higher price.

Can This Be Done?

Absolutely, I’ve done numerous transactions in Phoenix, although it is not as easy as it’s normally taught, however it is a proven real estate investment strategy with a very low barrier to entry.

 How Exactly Does Contract Assignment Work?

1. Find a motivated seller.

First let’s begin with what a motivated seller is. This is an individual who NEEDS to sell a property normally very quickly. There is usually some sort of distress going on in their lives. There is a huge disparity between want to sell and need to sell. Knowing which category your seller falls into is the first step in identifying how to handle the situation.

If I want to sell, there is no since of urgency. There’s normally no timeframe in which to finalize the sale. However, “need to sell” sounds like this :”I have to sell this house now because I’m moving to Maryland to take care of my ailing mother, and I have no other family members in the area.” This is a “need to sell” scenario.

Meanwhile, “want to sell” sounds a lot different: “I’m curious to see what my house is worth because I may be selling next year.” As you can see, there is a reason behind the need to sell versus the second scenario, where there is just curiosity.

There are numerous ways to find motivated sellers, such as driving for dollars, newspaper ads, internet marketing, direct mail marketing, etc. If you begin to research real estate marketing, you will find many forms, but make sure you use a combination of multiple strategies.

Related:Wholesalers Get a Bad Rap — But They’re Essential to Investors for These 3 Reasons

2. Get the contract.

There are many assignment contract templates on the web; however, I make sure an attorney at least has laid his/her eyes on it and approves the document. There are two reasons this is so critical. First, you will have comfort knowing your document is legally sound. Second, you will be able to utilize that attorney as counsel in the event you find yourself in litigation.

There is critical verbiage that need to be added to your assignment contract “and/or assigns.” Why is this so critical? This verbiage authorizes you to re-trade the property to another buyer who is interested in the property. When you receive the signed contract, you now have equitable interest in the property and have some legal standing in what happens to the property.

To provide clarity to the seller if asked about the “and/or assigns” clause, I inform them that we buy numerous houses, and we often have funding partners that we work with. These partners ensure we have more than one set of eyes to run the numbers.

3. Submit contract to title.

This process may differ in each state, but there is normally either a title company or a closing attorney that will conduct a title search. The title search will check the historical records of the property to make sure there are no liens on the property. It is important not to sell a property with a defective title. The title company or the closing attorney is a independent third party hired to make sure the deal is fair as agreed upon in the contract.

4. Find your buyer and assign the contract assignment.

Here is another leg of marketing. Working to find your end buyer can be daunting, but once you have a solid buyer, you can begin the process of closing the transaction. First, when you find your buyer (via Craigslist ads, Zillow, email marketing etc.), you should require a nonrefundable earnest money deposit.

Having the buyer furnish an nonrefundable earnest money deposit secures your position in making a profit. This money will become yours whether the transaction closes or not. The earnest money can be as much or as little your require within reason. I’ve seen deposits of hundreds of dollars up to $5,000. When the buyer deposits the earnest money, you then know that your buyer has a real interest in the property and is willing to move forward. This fee is normally held by the title company or the closing attorney.

5. Get Paid!

This is what most of us want to hear. We get paid when the end buyer wires in the funds for the deal. This money will cover what you stated you were willing to buy the property from the seller for, as well as your fee for facilitating the transaction. As an example, if you told the seller you would buy the house for $45,000 and you then sold your interest in the property to the buyer for $50,000, then your assignment fee is $5,000.

Related:The Harsh Truth About Wholesaling Newbies Need to Know

It is important that everything is disclosed because I’ve seen transactions stall at the closing table due to the seller or the buyer does not agreeing with you as the assignor making money. Again, this is why you inform you seller specifically that you are going to make a profit; however, ensure them that they will still receive the amount agreed upon for the price.

Other Considerations

It is standard practice that assignments are done only on profits of $5,000 or below. But if you are comfortable with the seller and the buyer, it’s possible to assign a contract for a much higher fee.

In the event you are not comfortable with all parties in the transaction, a double close or simultaneous close will keep both legs of the transaction anonymous. Be aware not all title companies will agree to conduct a double close, so this needs to be discussed in advance.

Contract assignment cannot be done on all transactions. HUD homes, REOs, and listed properties present many barriers when trying to perform this type of transaction. With many REO properties, the lender will ensure there is a seasoning period — normally 90 days — before you can resell the property.

As you can see, there are some clear benefits to contract assignment for big paid days.

Investors: Have you ever assigned a contract? Any questions about this process?

Let me know your thoughts with a comment!

0 thoughts on “Pre Assignment Definition In Real Estate

Leave a Reply

Your email address will not be published. Required fields are marked *