Flipping Houses with Assignment Clauses – Part 1 of 4
Flipping houses with assignment clauses are commonly used by Canadian professional real estate investors because it gives them an advantage to sell the property before closing. One needs to understand thoroughly the legal aspect of it. Due to the complexity of Flipping houses with assignment clauses, one must learn from real estate investment experts as well as seeking a legal opinion in writing to protect you.
An assignment of an Agreement of Purchase and Sale is when the original buyer from the Builder or current owner agrees to allow a new buyer to take over the contract with the builder or current owner. The original buyer does not have to close with the builder or current owner and does not take possession (if occupancy has not taken place) or title to the property. The new buyer takes over and completes the property purchase with the Builder or current owner. Flipping real estate contracts are also known as wholesaling real estate.
What are the Advantages of Flipping houses with assignment clause?
There are a number of advantages to flipping houses with assignment clauses.
To the Seller/Assignor
1. The seller/assignor does not usually have to pay the builder’s closing costs and land transfer tax.
2. The seller/assignor does not have to pay the GST/HST rebate back to the builder. This would be payable on closing by anyone who does not intend to occupy the property, and sells it, or will not have it occupied by a family member. If the seller/assignor was renting out the property, they would still have to pay the rebate back to the builder on closing and claim it back from the government. This can be a significant expense.
3. The seller/assignor avoids the carrying costs (mortgage, maintenance fees, taxes, etc.) for the time between listing the property and selling it.
To the Buyer/ Assignee
1. The buyer/assignee may receive a price advantage over current properties on the market.
2. The buyer/assignee will receive a brand-new home and, depending on when the assignment takes place, have the ability to make finishing selections.
3. The buyer/assignee may be able to avoid Toronto Land Transfer Tax if the original Agreement of Purchase and Sale was signed before December 31, 2007.
4. The buyer/assignee may be able to take advantage of the deposits of the original buyer and be able to put less of a down payment on a property than he would otherwise have been able to.
When can you flip houses with assignment clauses?
Unlike standard purchase and sale agreements, most new home agreements contain a clause that prohibits the assignment of the contract to any individual. There are exceptions to this where, at the time the initial contract was signed; the builder or current owner has specifically agreed to allow for an assignment of the contract. The buyer or real estate investor has the right to assign anytime before closing.
Who will pay the assignment (flipping) fee?
In most instances the new buyer will pay the difference to the original buyer.
For example: Mr. Original Buyer has the property under contract for $100,000.00 and someone else want to buy it for $110,000.00 You (The flipper) will get your assignment fees of $10,000.00 on or before closing.
Usually the original buyer has paid deposits to the builder or the current owners under the contract. When the contract is assigned these deposits are taken over by the new buyer. The original buyer will usually want their deposits back as well as the assignment fee (wholesaling fee) profit on the sale. These details need to be negotiated before signing up the assignment form.
When will closing take place?
Closing of the transaction will be as per the original purchase and sale agreement. Amendments can be made upon the approval of the seller of the property.
The purchase and sale agreement should be conditional on obtaining a satisfactory mortgage within 5 banking days. However, one should ensure that the mortgage is arranged on the new assignment purchase price. Some mortgage brokers are unfamiliar with mortgages on assignment transactions and as such getting approval for the loan on the new purchase price can be difficult. The new buyer must contact an experienced mortgage broker familiar with assignments to obtain the appropriate confirmation of mortgage.
Even though the builder or current owner may not have agreed to it in its assignment agreement, one should consider putting in a clause expressly allowing the original buyer to complete the transaction with the builder or current owner if the new buyer does not.
There are extra legal fees on assignments associated with drafting and reviewing the schedule and agreement as noted above, as well as with the multiple closings associated with an assignment transaction (the new buyer’s lawyer has to close with the builder or current owner and with the original buyer’s lawyer). Some lawyers do not deal with flipping houses with assignment clause and you should select a lawyer for each side who is familiar with this process.
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