June 29, 2024
A recent phenomenon that we are starting to observe in the real estate market is the brutal state of condo assignment sellers. An increasing number of pre-construction condo assignors in the GTA are facing major difficulties in closing deals. This shortfall is triggering a sell-off, with unit prices dropping and sellers losing all of their deposit and more! First of all, what is an assignment sale?
An assignment sale is a type of real estate transaction that with pre-construction properties. This is where the original buyer transfers their rights and obligations under the Agreement of Purchase and Sale to a new buyer, before closing or taking possession of the property. The new buyer then steps into the original buyer’s position and completes the deal directly with the builder.
In a market where all odds are against the assignor, it is important for assignors to be aware of the heavy competition surrounding them. There are desperate assignment sellers who bought units that they cannot afford to close and there is more assignment inventory than there has ever been. To top it off, there are even more resale condos on the market than there has been in the past decade. That means the only way to succeed at an assignment sale is to make the unit better priced than other competing assignment listings AND the resale market. This surge in assignment availability has driven unit prices to take a major plunge below the original purchase price. Consequently, assignment sellers are often forced to accept significantly lower offers than anticipated. Not only failing to make profit but facing extensive loss out of their own pockets.
The interest in assignment flipping really escalated after the year of 2020 due to its belief of high profitability. Stories of people making hundreds of thousands of dollars without closing between 2018-2020 circulated through the market. Family, friends, and realtors passed along such anecdotes gambling their interests without being fully aware of the risks involved.
In the midst of this dilemma, appraisals are serving as the safety blanket for newly completed condo units, providing them with value and allowing people to close. When observing the prices of resale condos between the years of 2018 to 2024, it can be seen that the price per sqft remains the same, that is $1000/sqft. That is zero nominal change in a period of six years! This is a whole building cycle for pre-construction properties. Pre-construction condos purchased in those years are worth way more than $1000/sqft with closings coming up in 2025 and onwards. In this situation, if appraisals don’t come in, then the average investor would not have hundreds of thousands of dollars to make up for the substantial shortfall.
Another trend that we can observe in the preconstruction market is the steep decline in projected completions as presales are not happening. The only people active in the preconstruction market right now are end users, people who are buying to downsize or upsize. However, it is worth pointing out that end users only make up 20-30% of the pre-construction buying pool and the rest are investors. This is because end users don’t want to wait 5 or 6 years for their unit to complete, so they are more active in the resale market. Less investors active in the pre-construction market means that there will be much less project completions in the future.
What does this mean for the real estate market? This means that we have a real supply issue for the future if our population continues to grow at this rate, as the fastest growing metropolitan area in North America. However, waiting for this demand to play out is not a solution for the dilemma in assignment sales today. This phenomenon may take longer than expected to come to play.
Assignors are backed into a corner in the situation of today’s market. Assignors are forced into a situation of selling at a loss, and refusing to sell at a loss means that they are forced into closing as the buyers of the unit. Either way, assignors in the pre-construction condo market are finding themselves in a tough spot.
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