Yes, you read that correctly. And yes, it was a really bad play on words. Well, I guess now I know what it feels like to be the headline writer for the Toronto Sun…
We rarely talk about “condo assignments” on this blog, since I don’t sell or deal with any pre-construction condos, and I think the assignment “market” is non-existent.
But I wanted to talk today about the ludicrous “adjustments” that developers levy upon closing of pre-construction condos, but also how utterly insane sellers are to think they can assign their Agreement, and avoid paying these costs…
Have a look at the following.
This is both the worst and greatest thing I’ve ever seen.
It’s sad for the buyer, but just incredible in terms of demonstrating how messed up the pre-construction condo industry is.
I found this thread on www.redflagdeals.com, where a buyer was talking about closing his condo that he purchased in pre-construction:
I brought a 1 bedroom plus a den condo at 295 Adelaide St W, Toronto by Pinnacle on Adelaide for $349,900. And it is closing next week, I just received the final adjustment numbers from the vendor and I am shocked! I didn’t budget it for this kind of money $53,971 in adjustment and other closing fees.
Purchased price $349,900
HST Rebate $26,894.68
Deposit Administration Fee ($84.75 per deposit cheques – I made 3 deposits) $254.25
Interest on deferred amount $2,528.48
Common expenses $1,223.84
Estimated 2014 reality taxes $881.94
Estimated 2015 interim reality taxes $1,749.50
Tarion fee $971.80
Status Certificate $100.00
Legal Fees Re Partial Discharge(s) (vendor mortgage discharge fees) $621.50
Bennett Jones LLP (builder’s lawyer) $975.75
Adjustments
Charge-Improvement/Art $577.51
Hydro, Water Gas $514.38
Education $614.72
Section 3 $9,409.51
Law Society Levy $73.45
2 Bedroom Levy $6,579.99
What the heck is 2 bedroom levy when I only have 1 plus den?? And Section 3 for a whopping $9,409.51??
First of all, note the line “I didn’t budget for this.”
That’s this person’s fault, for not being prepared, but it’s also not his fault, since most buyers have no clue how bad developers are going to screw them upon closing.
Imagine buying a condo for $349,900, and paying $53,971 in closing costs?
It can get a LOT worse than this, trust me. Google “closing cost horror stories” and you’ll read articles about buyers who had to pay 6-figures.
But I chose to highlight the above example because a 1-bedroom condo is common, a $350K condo is common, and this buyer’s story is exceptionally common.
I love the part about the “2-bedroom levy” when he only bought a 1-plus-den. What’s the levy for anyways? And what is the magical “Section 3?” Is this where the buyer pays the builder’s development charges from the City of Toronto?
Look, we could pick apart this statement of closing costs all day. The point of this blog wasn’t really to discuss pre-construction condos and the risks associated with buying. I’ve done that for eight years, and I’m at the point where I almost take a small amount of joy in hearing from the people that didn’t listen to me…
I wanted to talk more about the idea of “condo assignments,” and how crazy some assingors are to believe they can weasel out of these costs.
Let me come up with a couple of analogies…
You go to a popular restaurant in the dead of winter, and because it’s so packed, you have to wait outside in the cold, and it takes a half-hour just to get inside. Once you’re in the foyer, you put your name on the waiting list, and then sit for ninety minutes until your table is ready. The service is awful, and the waiter takes forever to take your order. An hour later, your food arrives at the table. And at that point, somebody takes your seat, and eats your meal. Oh – and you pay for it.
That sucks, right?
Maybe this isn’t the perfect parallel to what I’m trying to say…
How about this: you’re speeding in traffic, and a cop pulls you over. Then suddenly, another car pulls up, a man gets out and says, “It wasn’t him, it was me. I’ll pay the ticket, and have it go against my record.”
Hmmmm…..that’s not right analogy either.
Okay, well, why don’t I explain what’s going on with these would-be sellers of condo assignments, and then you can see what I’m getting at.
Take a condo was purchased in pre-construction, is now built and occupied, and is scheduled to be registered in two months. Upon closing of the unit, the buyer will pay land transfer tax, closing costs, and adjustments to the developer.
So let’s say that the buyer of this unit is looking to sell, but of course, he can’t sell what he doesn’t own; the building isn’t “registered” yet, as it’s in “occupancy.” The building will be registered in two months, so the buyer can “assign” his unit to a third party, and that third party can close the deal with the developer.
The buyer, who becomes the seller/assignor, is looking for an assignee to take on the terms, conditions, and responsibilities (ie. liabilities) of the original Agreement.
This, theoretically, could come with paying ALL the closing costs and adjustments.
So my question: why the $&%$@ would anybody ever purchase this assignment?
They wouldn’t. Right? That’s what you’re thinking? Because you’re all knowledgeable, informed readers of TRB who also probably wouldn’t assume that a “Free Starbucks Coffee, First Come First Serve” doesn’t last FOREVER? 🙂
But it doesn’t stop people from listing their “assignments” before closing, and hoping that somebody steps up to the plate and assumes $50,000 worth of closing costs.
A sucker is born every day, right?
Two weeks ago, I went to show a unit in the Queen West area to a client that wanted to check out the building, even though it wasn’t registered yet.
The unit has been “occupied” for over a year, and the building is finished, but there’s no “condominium corporation” yet, and thus the seller can’t sell. He has to assign.
The unit shows up on MLS like any other – great photos, full description, virtual tour, and everything you’d expect to find in a half-decent listing. But in the broker’s notes, it says, “This Is An Assignment Sale. Building Expected To Register In April.”
I showed the unit, and my client wasn’t all that interested. It was probably over-priced by a good 6-8% in my professional opinion. But the listing agent, who also happens to be the seller/owner/assignor, called me for feedback.
I tried to be helpful, and kind at the same time. I told him, “It’s a nice unit, it’s just not for my client.”
I told him how I don’t deal with assignments, and how I find them to be “messy” in nature – what with all the unknowns. The risks, the clauses and conditions that are needed, the hold-back of sale proceeds to account for future taxes and fees, and of course – the adjustments.
To my utter amazement, the seller said to me, “Well none of that is my problem.”
I asked simply, “How d’ya figure?”
He said, “Well this is an assignment. I’m not looking to cross the finish line holding the buyer’s hand here. I’m outtie – see ya!”
He finished his sentence, and I didn’t say anything. My mind was spinning like a hamster on a wheel. Picture my brow furrowed, staring at the wall of my office, trying to understand this guy.
Silence persisted, and finally I said, “Come again?” I couldn’t think of an easier way to put it.
He said, “What’s not to understand? I’m saying – this isn’t a sale, it’s an assignment. The buyer here is going to take on my Agreement of Purchase & Sale, and the rest of the transaction is up to him.”
I was already writing this blog in my head as I picked my way through this mine-field of a conversation, and I asked bluntly, “Sorry…….are you saying that you expect the buyer to pay all of your closing costs and adjustments?”
He replied, “Buddy – those aren’t MY closing costs and adjustments. If the assignee becomes the buyer, then HE closes with the developer and HE pays the adjustments.”
Again, I was shocked.
Was this guy for real?
I want to start a bar fight, but I want somebody else to get the glass bottle to the eye at the end.
This condo is likely going to register in two months, so why in the world would any buyer choose to become the “assignee,” and purchase it now, inherit $30-$50K in potential closing costs, when they can just wait two months and buy it as a resale condo?
Sure, the City of Toronto gets Land Transfer Tax twice, but why would anybody take on somebody else’s closing costs?
It’s not like this was some sort of deal either – the unit is blatantly over-priced, and had a tenant attached until July 31st!
“This is how assignments work,” the agent/owner/assignor told me as I sat in silence, trying to digest it all.
“I respectfully disagree,” I told him. “Best of luck with the sale.”
I learned a long time ago not to argue with people like that. He’s utterly uninformed, and for a Realtor, he knows very little about real estate.
This bothered me for a little while, as I wondered if the buyers of pre-construction condos REALLY think they can find somebody to assume their massive closing costs – especially so soon before closing. So I found three random assignments on MLS, and called all three agents to ask what their clients were hoping to do with the closing costs.
One agent was as confused as I was, and he said, “Well, I don’t expect your buyer to take on all the closing costs on his own, so obviously something would be worked out.”
One agent suggested that the costs would be split evenly, since the unit was only in the second month of occupancy, and it likely had another year to go. I didn’t understand the logic there.
And the third agent didn’t answer any of my questions, and just kept saying, “Put it on paper! Let’s get it down! Bring me some paper and we’ll work it; we’ll work it over and over and we’ll get it together!”
One of of three ain’t bad…
The worst part about all this mess is my fear that today’s pre-construction buyers (not that I really care what happens to somebody that plays with fire) have this insane notion that they can buy on paper, and then assign the piece of paper right before closing to avoid paying the massive adjustments that they were probably too stupid to cap.
Most pre-construction buyers don’t hire a lawyer to go over the Agreement of Purchase & Sale during the mandated 10-day rescission period, aka “cooling off period.” They’re the buyers that get hit with adjustments upon closing, and developers count on people being too cheap to pay $2,500 for a thorough legal review, only to get hit with adjustments ten times that.
I understand that some people try to “flip paper” after they’ve bought at some VVVVIP sales event, and want to make a quick $20K five months later. I don’t agree, but I understand the logic.
But to try and sell an assignment two months before registration? How can ANY seller/assignor think the world is that stupid?
I guess stupid is as stupid does. And maybe stupid attracts stupid(er).
This whole conversation is just plain dumb. In fact, I think we are all dumber for having taken part in it…….just like…………remember…..
Paully
at 7:31 am
Can someone help me out here?
“HST Rebate?”
How is a rebate added to his closing costs? Shouldn’t a rebate be deducted?
Appraiser
at 9:17 am
@ Paully: The HST line item caught my attention too. The HST is not payable on re-sale properties and is usually included in the sale price of new construction, if the property is to be owner-occupied or rented out (but not flipped). The seller (builder) applies to the CRA for the rebate of the tax and has the buyer sign a form to that effect within the mountain of documentation upon purchase.
If the buyer declared up front the he / she intends to flip the property (a declaration that almost never happens, wink-wink), then the HST is payable on closing.
Appraiser
at 9:24 am
@ Paully: P.S. For further clarification: If the buyer declared that he/she intends to rent out the unit, then the HST is also payable on closing, but subject to rebate upon application to the CRA within 2 years after closing. Proof that the property was in fact rented out may be required.
Neil
at 8:58 am
If you read the readflagdeals thread, the guy says he put in an offer to purchase with a cap on closing fees, the developer refused it, and he bought anyway. So with buyers like that, no wonder developers can get away with anything.
Patty
at 8:59 am
Great post. I am not in the market at the moment but like to stay educated and learned a lot today.
GinaTO
at 10:26 am
“How can ANY seller/assignor think the world is that stupid?”
After yesterday’s blog post, do you really need an answer to this question?? On another note, I would love to know what happened to the first unit – will it sell before registration, will the agent/owner tone down his attitude once he’s stuck with the closing costs… Give us a follow-up in April!
Darren
at 10:57 am
I know this is not exactly the topic on hand, but when I bought my last condo I was amazed by the stupidity of some of the other buyers.
I think even before the building was started I joined a facebook group with a bunch of the other owners so we could say hello and share any information we might have had about closing dates, etc.
Fast forward a couple years as the PDI phase had begun and I read something that blew my mind. One of the other people said something like “I just got a letter to schedule my PDI. Is it too early to get a lawyer”?
I was floored. I’d been speaking to this guy for quite some time. He was a smart guy. Educated with a good job. As it turned out he was not the only one to not have a lawyer yet. Almost nobody had bothered to see a lawyer after signing their contracts!
We live in an age when people won’t spend $20 without researching something on the internet, yet here I was with many otherwise smart, reasonably well off people who spent more than a quarter of a million dollars – often much more – without doing a single piece of research!
While I find the practices of these companies repugnant and like David I am very much in favour of some significant changes to the condo act, I also think that these buyers deserve some of the blame.
If what Neil said is true and the buyer was denied a cap and proceeded, then he/she deserves it without any sympathy.
BTW David, it doesn’t cost $2500 to get a contract looked over with suggested amendments. It only costs about a tenth of that.
As to your question, are there people stupid enough to buy these contracts so close to closing? IMO, yes there are.
crazyegg
at 11:03 am
Hi All,
In my experience, condo closing costs are not typically that high for the average person who intends to LIVE in the 1 BR $350000 condo on closing.
If you RENT it out, you will have to pay the HST rebate amount back to the feds but they will give it back to you in the form of “another rebate” typically in 6 weeks or so after closing.
The most I have paid for any levies was $5000 for a highrise. Most mid or low rises do not have any levies if they are already in established areas with parks and infrastructure already in place.
I am firm believer as a Realtor, homeowner and investor that new construction is the way to go if you want the best bang for the buck (and least headache) to make a capital gain (and collect rent to make positive cash flow each month.
BONUS TIP: Buy new low-mid rise condos in established areas to minimize on closing costs. It has worked for me and my friends and clients.
Regards,
ed…
Darren
at 11:10 am
@crazegg
How is buying and older place (even if just registered) with a quick, clean, lower extra costs closing more of a headache than the long drawn out process of buying new?
As for best bang for the buck. Certainly true during the past when I’ve bought condos, but not anymore. Have you bought anything recently? Pre-construction now is more expensive than existing..
crazyegg
at 3:23 pm
Hi Darren,
I should rephrase: Buying new construction is less of a headache if you are buying for investment. The return on investment is typically higher than if buying resale. Think about it, you put down 5% down in first month, another 5% in 6 months and another 5% in 12 months. In the mean time, the market value of the unit would have generally appreciated.
In general, condo investors in Toronto should not really care too much if the condo is delayed by a few months or even a year. Life goes one. Let the value appreciate in the mean time (as long as you bought the right unit in the right area).
The main thing is to look for key new low rise condos in established areas so as to minimize levies and closing costs. The second thing to look for is the cheapest unit in that building so as to minimize mortgage costs and maintenance fees.
I have personally purchased 3 investment condo units in the past 5 years or so. I still hold all 3 units. All 3 have always been rented with a positive cash flow each month.
*Unit one: 2BR stacked 637SF TH for $220K now worth $360K – $0 levies
*Unit two: Bachelor low rise 430SF for $240K now worth $285K – just registered – $800 levies I think
*Unit three: 1BR low rise 485SF for $255K – still under construction – $5000 levies capped – ouch!
BONUS TIP 2: Time (i.e. sometimes delays) is your friend when you are buying a condo for investment.
Regards,
ed…
Mike
at 4:18 pm
How much return are you making for such an illiquid investment?
How long between when you purchased the units listed above and when you’ve given their market value. And since they seem to be income properties, do you mind sharing what kind of leverage you’re using?
crazyegg
at 2:28 pm
Hi Mike,
I am a bull when it comes to new construction for boutique condos for investment in Toronto.
You can calculate the net capital gain yourself from the above numbers.
I would respectfully disagree with you that these are illiquid investments. But then again, to each his own. Some folks are perfectly happy earning 3% interest in GIC per year and get it taxed at 100% come April, but not me.
These were all purchased in staggering years in the past 5 years. You need to put down the standard builder downpayment but with the right condo in the right area (and lots of luck) I refinanced the first investment property and essentially put down 0%. That’s right 0% downpayment. We used the proceeds to acquire other investments and enjoy life. Talk to your mortgage broker for details.
Regards,
ed..
navyliz
at 4:39 pm
How are you getting a positive cash flow (not to mention renting) on unit 3 if it is still under construction?
crazyegg
at 2:31 pm
Hi N,
Ooops. I am glad that someone is reading this without glazed eyes.
I got confused with renting out my accessory apartment in my principal home.
All other numbers are correct. Thanks
Regards,
ed…
condodweller
at 4:06 am
@crazyegg: I have a 1BR high rise 500+SF unit in the downtown core for which I paid ~170K. With a 25% downpayment I’m barely cashflow positive, say a few hundred $$/month and I’m getting top $$ due to the location. I have a hard time believing you are cash flow positive unless you put down a large downpayment given the size and I don’t think you are in a prime location based on your descirption. I’m curious how long you plan to hold on to them and what your return on investment is given x# of years of ownership. Unfortunately significant cash flow will only come once the mortgage is paid off in about 20 years and if you hold on that long that really depreciates the capital gain since it has to be divided by the number of years held to arrive at the yearly return on investment.
Cheers
crazyegg
at 6:23 pm
Hi CD,
If you are making a few hundred $$/month, why are you saying that is barely cashflow positive? I would say it pretty darn good. Your ROI works out to about 6% per annum based on a 25% down. Why are you so greedy? 😉
Drivers of positive cashflow are:
Higher downpayment amount – but you refinance to get some of it back later as condo appreciates
Lower interest rate
Lower maintenance fee
HIGHER rent
For the place that just closed last month, I am getting $1475 rent, no locker and no parking (for 430 SF, way smaller than yours). This unit is not a “downtown”. It is in a much “better” area.
My cashflow here is $150 (you are doing much better than me here). I undercharged rent here as some are getting $1550 now. Live and learn…
As you stated, you don’t get rich with cashflow here. It’s when you sell. Best of luck.
Regards,
ed…
Kyle
at 12:08 pm
Some interesting stats: http://www.moneysense.ca/property/income/investors-buying-condos
Gordy
at 5:14 pm
Uh, what? New places are built like shit, developers are lying bastards, and the headaches are momentous.
So, to paraphrase, I agree with exactly what you said, except the opposite.
Chroscklh
at 11:28 am
I dont understand who buy this deal. Is bad deal. Do all close costs for pre-construct get this high or is this particular bad purchase by assignhole? Is it truth that maybe one time, you could sell assignment + close costs because condo bought at 349$ now worth 450$ so buyer come out ahead – even with close cost? But today -preconstruct is price too high, yes?
Mike
at 11:46 am
The most expensive thing you can do is save money on your legal costs.
I’ve never understood anyone who signs an agreement without having a lawyer read it first, particularly a condo that has yet to be built or an unconditional offer
Libertarian
at 11:57 am
David sounds like Garth Turner with this post. hahaha!!!
All this talk about people rushing in to buy real estate without doing the research and happily spending hundreds of thousands of dollars because that’s what society tells them to do. Sounds like the greater fool theory to me. David even criticizes other real estate agents.
I’m always fascinated at how much David and Garth have in common! It’s more than one would expect.
David Fleming
at 12:36 pm
@ Liberterian
We have one major thing in common: we are both chick-magnets. I’m just missing the sexy beard…
Libertarian
at 2:06 pm
I have a beard. It doesn’t make me a chick-magnet. Maybe the beard isn’t sexy enough. Or maybe if I had a blog, my beard would be sexy. Life is so complicated. haha!!
Jonathan
at 1:31 pm
As Chroscklh alluded to, there’s nothing inherently wrong with an assignment, it’s just a matter of pricing. The assignment price should be equal to equivalent resale price less closing costs and occupancy charges. Of course, most people “selling” assignments are greedy and delusional which is a bit of a problem.
Steve
at 1:53 pm
Excellent post … one more reason to stay away from pre-construction condos. And shocking to find out how many “realtors” appear so ignorant regarding their own profession. It almost makes you want to just rent forever!
Clifford
at 8:54 pm
I think at this point anyone willing to buy precon shitboxes has something wrong with them.
Appraiser
at 7:21 am
Oh look. Seems like some of the bears and perma-renters are starting to get a little full of themselves. Well, they aren’t going to like the February mid-month re-sale housing figures from TREB:
Highlights – Sales up 14.9%. Prices up 10.3%. Sales of detached homes in the 416 up 25.3%!
Wait for it: Average sale price for detached homes in the 416 – $1,056,238 !!
Anthony
at 12:07 am
Why must your topics be always a one sided argument.
If you always want to find all the bad things to ramble on then obviously its a skewed perspective. Example: dogs are bad because they bark a lot, pee by accident, and need attention. But you can argue dogs are great because (fill in the blank). Or there are a 100 reasons why one should marry. Point is your articles rarely ever bring a balance perspective as a good debate would have.
Regarding the HST rule, Appraiser has posted wrong information. Read on CRA to get the right info. The HST rebate is claimed back as a new residential property rental rebate. You must lease it out for minimum 1 year to qualify for the rebate. Google that to find out more. Flipping is not considered an investment.
The comment about preconstruction is a better investment than resale is dependent on whether 1) it was a under valued price 2) if the market has appreciate at the completion 3) and if 1) +2) minus closing cost fees + selling commission = a profitable investment or not. But it gets more complex then that after you factor in that resales take in rental income immediately whereas preconstruction doesn’t. So which is more profitable in a 5 year scale? That’s where you need to know the market. Anyone who simplifies things is just as ignorant as this one sided article about assignment closing cost fees. Like one poster alluded to…the fees could be high but what about the profit? If it was worth it then why not. But this article doesn’t bring that thought to light and just keeps going down a one sided track to a dead end conclusion.