What is an Assignment Clause?
An Assignment clause is a part in a purchase contract which allows a buyer to resell or transfer his or her right to buy the property to another buyer before closing.
The idea of the assignment clause was to give buyers a legal way of backing out of a purchase if they could not close the purchase.
The buyers could sell their contract to someone else, if for some reason their situation changed after their purchase offer was accepted. In this way they could protect their deposit.
As with most rules, someone always finds a way to misuse it for their benefit. The misuse of the intended use of the Assignment Clause is one of these rules.
How an Assignment Clause works:
The buyer (Assignor), signs an Agreement of Purchase and Sale with a Builder or seller. The buyer never transfers title to the property, instead they let another buyer (Assignee) to step into his/her shoes. An “Assignment of rights” gives the Assignee the right to take the title in their own name. Some people call this “shadow flipping“.
In many cases the Assignee pays a premium on what the Assignor agreed to buy the property for. The difference becomes the original buyers profit in what people call “flipping a home”. The original sellers receive less for their property, with the final buyer paying an greater price for the same property.
New Homes and Condominiums
Long closing dates make new homes and condominiums a prime target for this type of deal. This puts the Assignor in a position to make a profit by inflating the new price. This new price geing generally well above what they agreed to pay the seller or builder in the first place.
In Montreal in the 1980’s construction boom it became prevalent in the new housing market. Buyers were putting deposits on many homes, and then selling their buyers rights to other buyers. As a result, this created a hot real-estate market as there was a greater demand than what the builders were able to deliver.
Developers noticed this trend and some of them stopped, or reduced, it by putting in a clause for progressive payments at various stages of construction.
This made it difficult for buyers to be able to buy multiple properties.
This practice is very controversial and has greatly affected the housing market, adding to the accelerated increase in home prices. This activity hit the Toronto and Vancouver markets the hardest. Toronto’s Condo Flipping market has become a marketplace for these Assignment Sales where the original buyers never take possession.
The Ontario Real Estate Association (OREA) website has some good advice on what consumers need to know about Assignments.