As seen in The Globe & Mail
Marketing a condo in the Toronto real estate landscape is tricky, says veteran agent Robin Pope. It’s even more complex in the shadowy corner of the market where people try to unload their obligation to take possession of an unfinished property.
Sellers in the so-called assignment market have to find a buyer without revealing the project’s name or the unit number. They pay a fee to the builder for the right to do so, says the broker with Pope Real Estate Ltd.
“The developer doesn’t help you at all – he’s only there with his hand out.”
Mr. Pope recently heard from one investor who looked at the current environment of high interest rates and slow real estate sales and asked him to suss out how much her contract to purchase an unfinished unit would be worth to another buyer.
“It’s kind of an underground real estate market,” he says. “You can’t just stand on the corner of the street and say, ‘pssst – do you want to buy a condo?’”
When condo prices were rapidly climbing, speculators made money by purchasing a unit with a small deposit, then flipping the contract in the assignment market without ever setting foot inside the unit.
“The pipe is long – if you buy something on opening day, it might be four or five years before you see it,” Mr. Pope says.
Fast forward to 2022, interest rates have spiked and buyers of preconstruction units must be preapproved for financing and pass a mortgage stress test before they close the deal. Some can’t afford the monthly carrying costs and want out.
“They are very motivated because they wouldn’t be able to close,” Mr. Pope says. “They’re saying, ‘I don’t want to lose the farm.’”
Now developers, real estate agents and lenders are watching to see whether the industry will face a flood of assignment sales as preconstruction buyers face closing a deal without the cash to do so.
Simeon Papailias, managing partner of Royal LePage’s REC Canada, estimates that the number of assignment listings in Ontario has doubled over the past six months.
Broker Pocket, one technology platform for assignment listings, had 100 per cent more inventory in September compared with March, says Mr. Papailias, who expects the trend to continue as interest rates continue to rise.
Mr. Papailias says assignment sales are not tracked in any official registry in Ontario, but he figures that such deals represented between 5 and 10 per cent of the preconstruction market in recent years.
Those preconstruction buyers who can’t close represent only a fringe of the market, he adds.
But potential buyers of those assignmenst are mostly waiting on the sidelines at the moment, according to Mr. Papailias.
“There are investors looking for blood in the water,” he says. “They are looking for anybody who can’t close and just wants to get out with their original deposit.”
Mr. Papailias includes himself in that cohort.
“I would literally buy you out in three seconds flat.”
Investors are watching for signs that the real estate market decline is reaching a bottom, he says. In the meantime, Mr. Papailias is seeing some builders willing to take back the contract because they can resell the unit at a higher price today.
Mr. Papailias is holding onto his own preconstruction portfolio because he believes the market is temporarily depressed while rates are on the rise.
He says a handful of sellers in the assignment market may be feeling panicked, but he doesn’t expect any discounting to spill over into the broader market.
Mr. Pope doesn’t foresee a wide contagion but he points out that buyers who purchase a unit in the assignment market because they want to live in it will stop searching in the resale market.
“Buyers are scarce right now. It’s one less buyer.”
His own client decided against selling her contract and plans to rent out the unit, Mr. Pope says.
“She doesn’t have a gun to her head.”
Anna Wong, real estate agent at Strata.ca, was already steering her clients away from some preconstruction projects earlier this year because the bet on future value seemed too high-risk, in her opinion.
In one case, a developer was selling a 384-square-foot studio unit near Yonge Street and Eglinton Avenue at a lofty $750,000, or nearly $2,000 a square foot.
“I always do the math with my clients to make sure it’s worth the risk,” Ms. Wong says.
She believes some early buyers will be hurt.
“Even if they want to let it go as an assignment, they’re going to lose,” she says.
Recently Ms. Wong has been seeing prices slide for listings currently on the assignment market.
Earlier this year, the lowest-priced offerings on the assignment market were listed at about $550,000 for a studio apartment. This month, a one-bedroom unit in North York had been languishing at that price for 180 days.
“If nobody bites, that means you’ve priced too high,” she says.
She expects to see more dramatic price reductions in the months to come.
“When the closing date comes and they can’t get the mortgage, that’s when you’re going to see some good deals.”
Victor Tran, a mortgage specialist with rates.ca, expects many preconstruction buyers to face a challenge in securing financing.
“They’re in for a bit of a surprise. They’re simply not able to qualify.”
Mr. Tran says typically buyers who are facing this dilemma purchased units three or four years ago, and had their financial health assessed at the time.
But that preapproval is just a snapshot in time – not a guarantee that the buyer will be able to obtain a mortgage by the time the unit is finished.
“A lot can change,” says Mr. Tran, pointing to the recent steep rise in interest rates as one factor. “It’s always a gamble.”
Mr. Tran spoke with one twentysomething purchaser who lives with his parents in Markham, Ont., and handed a developer a deposit on a preconstruction condo in 2018.
The unit will be ready for final occupancy in a few months but the buyer doesn’t have the money to close or the financial health to secure a mortgage with a top-tier “A” lender.
Meanwhile, the building has reached the “occupancy” phase, which means that the young man must pay a monthly fee to the builder until the final closing.
This young man has found some tenants and is using the rental income to cover the fees. Even that solution can land a buyer in trouble because many builders don’t allow a tenant to move in during the occupancy phase.
“There are a lot of off-the-record deals,” Mr. Tran says.
The young man would gladly sell the assignment in order to be off the hook for the full amount at closing. But the builder is controlling the price and refuses to budge.
Mr. Tran does not blame buyers who have become fearful of purchasing in a declining market.
“I don’t think it’s a good idea to buy when the knife is falling.”
All of these forces leave the young man in a precarious situation.
“He’s willing just to offload this and move on with his life.”
His plan is to take a short-term loan from an alternative lender at a high rate of interest, sell the property as soon as possible after closing and pay back the loan.
Mr. Tran believes the young man will be successful in finding a short-term loan – but he will pay a steep price as lenders become more stringent.
“I think I’ll be hearing a lot more of these stories in the next six months.”
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Originally published in the Globe & Mail on