Condo assignment contract flips

Anyone done this before? Pros and cons? How much did you end up making/losing? How high was your total operational cost (assignment fee, lawyer, etc.)? How long did it take?

I'm thinking about investing around $75-100K now and hopefully making some money in a year or 2 but would like to learn from others' experience if they don't mind sharing. (I do have a meeting set up with a real estate agent but I'm certain that he will try to paint a nicer picture than the reality may be)

very interesting... curious to see how this turns out for you if you go ahead with it.

I have no idea what you are talking about but would be interested in knowing if you could explain in layman terms. I'm thinking since there have been over 80 views and only one reply I'm not the only one.

Just curious, that's all.

shanekingsley said:

very interesting... curious to see how this turns out for you if you go ahead with it.

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+1

My gut feel is that the market has topped. But let us know how you fare.

1. Purchase a pre-construction condo from a builder for x, downpayment/deposit of $75k
2. Before closing, sell this option to purchase the condo to another purchasor for y
3. y - x - costs = profit


*costs include tax implications -

[h=2]Tax obligations related to property flipping:[/h]You must report the money you make on all real estate transactions, including flips and assignment sales (of both pre-construction and resale homes), to the Canada Revenue Agency (CRA).
This could also include fees or commissions generated on these transactions.
[h=2]Know your tax obligations:[/h]

• The profits you make from flipping real estate are generally considered to be fully taxable as business income.
• The principal residence exemption does not apply to property flipping.
• These transactions may also be subject to GST/HST which you would be responsible for remitting to the CRA.

The CRA is taking action to address non-compliance in the real estate sector, and to ensure that the principal residence tax exemption is claimed only by those who are eligible for it.

hdsomeday said:

I have no idea what you are talking about but would be interested in knowing if you could explain in layman terms. I'm thinking since there have been over 80 views and only one reply I'm not the only one.

Just curious, that's all.

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Nevermind... already answered above.

I've done this a few times. Few misconceptions people have & some facts:

1. Tax - counts as 100% towards income. You don't own any property yet so there no capital gains implications... it's counted straight as income.
2. Value - Let's say you buy a condo for $300k and 2 years later it's worth $500k based on area comparable. You won't get $500k for it. More than likely $425k max. Your buyer will not get financing on the difference of the contract and what they paid to you. Their mortgage will only reflect on what the original price of the builder. It's a lot of cash to put out so there typically a good discount on this.
3. Realtors - Majority of assignment sales are done within the realtor's internal network (from my experience). Finding a good realtor that has these clients looking for investments is hard. They are pricier and typically want 5% commission sometimes.
4. Closing - If you're buyer doesn't close that means you are still liable to close with the builder so make sure you have the rest of the down funds + mortgage ready to go.
5. Funds - I always get the down I paid + whatever my profit is upfront from the buyer. It's a big chunk of change so they need to see a good upside otherwise they won't do it. The property you invest in should be able to attract this type of buyer.
6. Builders - Always read the assignment conditions on the contract. There are restrictions on how you can do an assignment sales. Builders are ******** and if you have a big gain on the property they will try to find a way to see if you violated any terms of the assignment. They won't hesitate to take the property back. Never listen to the realtor when he/she says "don't worry about it." Always follow the rules ... ALWAYS

Regarding tax - I see it as a very grey area so far. I am not yet convinced that it counts 100% towards the income at all times. "There is no specific provision subsumed within the income Tax Act outlining the circumstances in which the proceeds from a sale of property are to be reported as capital or business income." Of course if it does, then a huge chunk of the profit is eliminated.

Thank you for the detailed reply.

I don't think the market has dried out just yet as the green belt restricts urban sprawl, forcing developers to increase the density.
Starter home prices are still insane as well.
I also suspect that a large chunk of young adults nowadays have zero interest in owning a house, and dealing with any sort of maintenance.

I will let you guys know if I go ahead with it and if I do, was it worth it.

DemonPig said:

I don't think the market has dried out just yet

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Well, nobody can predict the future. Everyone with an opinion is just speculating.

Even if supply is going to be constrained in the future, as you think, I look at the rising interest rate environment we're in, heavily influenced by US monetary policy which is entirely out of our control, plus the debt-to-income ratio and wonder if real estate is in a bubble and is due for a correction or crash.

The Ontario economy right now is heavily biased towards real estate and its associated jobs and if that starts faltering, it's the bottom level of a house of cards that will tumble hard, destroying the "wealth effect" that's been powering all this growth the last decade or so.

If the market doesn't go the way you think it will, you're still on the hook for the delta between the contracted price and what you can sell it for, regardless of what your down-payment was. Even if your initial outlay was $75K, if the resale price drops below that, you can't walk away from your obligation to the developer. It's not even a true "option" like in equities, where the option can expire worthless and you lose your investment. It's closer to a short sell, where you could lose even more than the initial amount you put in.

You may also be caught up in a ripple effect if your fellow flippers can't afford to hold and wait, and have to dispose of their property in a fire-sale, causing resale values to plummet. How much are you willing to stand to lose on a $600K condo? $100K?

Anyway, nothing ventured, nothing gained. There are big rewards if you can read the market better than others and are willing to risk big as well.

Best of luck.

If something happens and you can't flip it you can just rent out the unit can't you? I bet a nice new condo in a good location downtown could go for close to 3 grand a month

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greaserman said:

If something happens and you can't flip it you can just rent out the unit can't you? I bet a nice new condo in a good location downtown could go for close to 3 grand a month

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If the flipper qualifies for a mortgage.

Most flippers don't get in the game to be a landlord.

Also, where are mortgage rates going to be in 2 years from now? 1% higher? 3% higher? What are the stress-test/qualification rules going to look like in the future? 20% downpayment? 30%? Will the flipper have the solvency to handle a vacant apartment for x months in the future if the economy tanks?

And the worst thing is that the banks will give you a mortgage for what the condo is appraised for at sale time (in the future), not what you agreed to buy from the developer.

You agreed to pay the developer $600K but when construction is finished, it's worth $450K. The banks will give you a $450K mortgage, not a $600K one, and it'll be up to you to find the additional $150K somewhere else to pay the developer the difference.

A lot of the builder/developers have put a "flipping" clause in the paperwork and may take a large chunk of the profit. It started a couple years ago to slow flipping . Have a decent property lawyer look at your contracts, not the real estate guy at the condo site.

I'm not sure the risk/reward in this market is worth it, but best of luck. Let us know how it comes out.

DemonPig said:

Regarding tax - I see it as a very grey area so far. I am not yet convinced that it counts 100% towards the income at all times. "There is no specific provision subsumed within the income Tax Act outlining the circumstances in which the proceeds from a sale of property are to be reported as capital or business income." Of course if it does, then a huge chunk of the profit is eliminated.

Thank you for the detailed reply.

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LiNK666 is correct. It is 100% taxable income. Make sure you have both a lawyer and accountant who are specialized in dealing with real estates (not just buying and selling - they need to understand real estate investments). Lawyers know the laws and rules, but it is the accountants who'll make sure you don't get into issues with CRA and make sure you max your profits.

Also to note is the HST. You have to factor in paying HST, plus the whole notion around HST rebate.

Most builders don't like assignments, and they put in the purchase & sale agreement that it is strictly prohibited, or they put a premium on assignment processing ($5,000 plus). It is something that is negotiable though on a case by case basis (same as the levies) when you are about to sign the P&S, just make sure it's in the agreement.

Lastly, the condo market will remain active with the current regulations pricing people out of houses. Location is key - you need to look at walking scores, transit availability, highways, etc. Most important is to look at comps (comparisons) for the last few years.

I am definitely allowed to buy on assignment with this particular builder. As for assignment fee, I don’t have to pay anything. That is one of the reasons I am interested. Lawyer fee is also covered by the real estate agent. Obviously the agent is looking for full 5% back at the end in return, which I could technically negotiate on still.

As for HST, I was under the impression that I don’t pay it unless I close.

I still have to talk to my accountant about how to handle profits and taxes.

Area is Downsview Park.

Finally, since this is my first time, can’t I claim that the intent of the condo was for private use initially? I understand that if I were to flip several in a row, there’s no escaping HST and taxes.

http://www.jimmysingh.ca/condo-house-assignments-cra-hst-facts/