Say GOODBYE to Assignments in Canada | Surrey REALTOR® explains why they may be a thing of the past

If you read our last post on all of the proposed changes in the recently released federal budget for 2022, there was a ton of things coming down the pipe for Canadians just like you. And whether you are home buyer, home seller or homeowner generally, these are some significant changes that you're going to want to be aware of. As promised in the last post, we are going to dive deep into some of the specific things that were released within that budget. And today's post is all about the taxing of assignment sales and the significant impact that is going to have on the marketplace. We're going to dive into what an assignment is, how it's going to affect the market, what it's going to look like when it rolls out, and the pros and cons of both.

So if you are ready to go down this trail with me, let's check it out. What's good, everybody? It's Darin Germyn from the Germyn Group where we know you've only got one chance to either buy or sell your next home in Surrey, BC. So we're here to help you get it right. So your first question, if you are new to the blog or maybe you don't know exactly what an assignment is. An assignment is basically where somebody buys a home off a developer as a presale.

That home may be completing years down the road. It could be completing soon, but nonetheless, it is an agreement to purchase a pre-sale property in between the time that buyer #1 we will call them, purchases the rights to buy that property from the developer, and the time that it completes, buyer #1 can choose to assign their contract, assign the rights of their contract. Let's call them buyer #2, when in that case, buyer #2 would now be the new owner of the property because they bought the rights of the contract from buyer #1.

Often times this happens in markets all across North America and there's nothing wrong with doing so. Yet buyer #1 typically assigns a property and assigns it to buyer #2 for a price higher than what they originally paid from the developer. The difference between the price that buyer #1 pays and buyer #2 pays, we call the lift. That is the difference in price. So as an example, buyer #1 buys the rights to this property off the developer for $400,000 and they sell as an assignment to buyer #2 the entire rights to the contract, but they sell it to buyer #2 for $500,000, creating a lift amount or a profit of approximately $100,000.

What the problem is that the federal government is trying to address is would be investors or property flippers jumping into the pre-sale market across Canada and tying up properties that they never intend to occupy or live in as a principal residence. They are simply speculating and trying to get the gains that they hope will occur in the marketplace and then thus assign the property to buyer #2 to make some money. This means that people that are looking for properties to actually move into as their principal residence are competing against property speculators and that can be seen to drive up the values in the real estate market. So the federal government thinks this is problematic and it is problematic. A quick example of this would be the Aldergrove Town Center complex and development in Aldergrove.

This is a beautiful master planned community that is not due to come out until about 2025. Now, when the first set of buildings or units was released in the Aldergrove Town Center development, there was only 71 units that were available. The developer released all 71 units to the market and they sold out almost instantly. And the interesting thing about that was there was almost 5,000 people who were looking to get into this development. The developer then released a second building for much higher prices than the first building which all sold out and then released a concrete tower,

The first two buildings were low rise, and the concrete tower was then released which also sold out. Just incredible. Now I want you to think, however, out of all of those 5,000 people that registered for the first building that originally went up for sale with 71 units, how many of those people could have been speculators? How many of those people actually intended to move in and occupy the property? And the answer to that is probably not a lot.

Now, obviously it's hard to pull statistics on something like that, but I think that we can agree that 5,000 people wanting to live in Aldergrove, all of their primary residence in this particular complex is a little far fetched. So we know there is likely lots of speculation and that is not unique to that particular complex. It's a beautiful development that is going to be built in 2025 and afterwards. But this is kind of a pandemic. Am I allowed to say that word?

I don't know. This is kind of like a pandemic for every new construction property we've been encountering for the last two years in Surrey and surrounding areas. So here is what is changing that the government is saying will be in effect as of May 7, 2022, very, very soon from now. In our original example, when buyer #1 buys a property from the developer and assigns the rights of their contract to buyer #2, there was no taxes typically paid on that assignment lift. So in our example of $100,000, that wasn't money that was necessarily getting taxed, creating a huge profit center for buyer #1, if the market increased in value and they were actually able to sell the home to buyer number two for a profit.

That's not going to happen anymore because now GST in British Columbia and other provinces have GST or other provinces have HST, which is going to be an even bigger hit, is now going to be charged on any of the assignment amount. The interesting thing about the budget is it doesn't specify on whether the GST or HST is going to be payable on the lift amount or the profit, as we called it, or the total sale price. So that is something we're still yet to see. This new tax can remove a lot of the profitability from buyer #1 and may change their decisions on whether this is a good idea in the first place.

Now why would this maybe not be a good idea? Because we're really only talking about 5% if it's GST in British Columbia, right? There are a couple of other factors at play for people thinking about buying an assignment and looking to flip it later. The first is they are now going to pay GST whether they complete on the property or not and assign it to somebody else. So there is a guaranteed 5%.

There are also other taxes involved as well. If the home is going to not be a principal residence, there is also property transfer tax applicable. So anybody that is buying under 750,000 in British Columbia and is going to use the home as a primary residence may qualify to not pay that amount. But for property flippers, you're also going to add roughly 2% to your total. Now your tax bill is up at 7%.

Now you've got a tax bill that is really starting to add up pretty quick. Now the other thing to also think about is if you are going to assign a property, very commonly there is assigner's fees that the developer expects. Now, years ago these fees weren't too bad. They may have been a couple of $100, maybe then they turned into a couple of thousand and then it was 1%, then it became 1.5%, 2%.

And now what's more common than not is we're actually seeing 3% developers assignment fees on top of all the other assignment fees that may be applicable. In our example of somebody that buys a home for about $500,000 that could be inwards around $15 to $16,000 of just assignment fees directly to the developer for allowing the buyer #1 to assign the offer to buyer #2. So Flippers will have to start weighing their options. Do they want to have to pay this maybe 3% assignment fee plus GST to assign it? Or is it better to complete on it and pay GST and property transfer tax and all the lawyers fees that go along with actually completing on the property.

So very, very interesting to see what's going to happen. But this is a huge change and as I mentioned earlier, it's probably a big change for the positive. Here's why. Again, it removes profitability for these property flippers and also reduces the incentive for these flippers because we've got short memories in real estate in British Columbia and everyone seems to think that property values will always, always, always go up. This isn't always the case.

There's been many times where we have seen the market be very flat or lose value. Now, losing value in our market is much more rare than the market being flat. But there have been many times in the past where the market value just kind of stayed relatively stagnant. This means anybody buying these properties as well with the intention to flip them, also has to be prepared that if they don't make any profit when it comes time to sell, they have to be prepared to close on the property. This is not always the case for a lot of people that get into this type of investment, what they consider an investment because they buy it with the intention that they will assign it away before they ever have to complete on the property.

So many of these people, should they be forced to actually have to close on these properties, might not even qualify to get a mortgage on them, which can be really problematic for them. So really the only way this formula is going to work moving forward and it's no different than the way it's always worked, is these people buying these properties, looking to assign them, are going to have to rely on the market making big gains to make it profitable for them to do it. So I've kind of alluded to this. I think it's great. I think it takes people out of the market who are just looking to make some money and really gives a little bit of strength back to the people who are actually buying homes to live in.

Now, we don't want to throw investors under the bus because investors who plan to actually complete on the property and rent it out to tenants. Well, hey guys, tenants need homes too. So it's a great thing for people to be investing in real estate for rental purposes as well. This move is going to remove some speculators from the market, but I'm not convinced it's going to remove those who are convinced that the market only goes up. In the example of Aldergrove Town Center, it's 2022.

That property is not completed until 2025. A lot of people are still probably going to roll the dice and assume that the market value of that property as we get closer to 2025 is going to be much higher than what it is today. So it'll be interesting to see how this plays out on the market, but again, it's a pretty huge change that anybody looking to flip these properties as an assignment is really going to have to consider before they get into bed with it. Anyways guys, I hope that all makes sense. It is a pretty big change coming down the pipe.

I want to appreciate you for sticking with me through this post and leave some comments in the area below. Let me know what your thoughts are about the changes, what you think it might do to impact the market or anything else you kind of want to discuss. Also, for anybody out there that's looking at selling their home in Surrey BC or surrounding areas, be sure to grab a copy of our PDF link below on four ways to increase your home's value by up to 5% in only a weekend. We Dove deep to get great information in this PDF and this is actually the same stuff that we give to our would-be home sellers to help them increase their sale prices as well. We didn't forget about our home buyers out there either.

If you're a first time home buyer looking at getting into the market, grab a copy of 6 things first time home buyers always screw up. It doesn't say always in the title but, screw up and how to get them right. You don't want to make these mistakes you guys. If you're looking to buy your first home this will set you on the right path and help you do it properly.

I'm Darin Germyn from the Germyn Group where we know you've only got one chance to either buy or sell your next home so we're here to help you get it right. If you want to book time to speak with me directly. The link is below. Thank you for reading and we'll look forward to seeing you next time.

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