Careful, pre-construction condo investors. Lenders don't like funding assignments

Softening condo markets in Canada's biggest cities are poking holes in a popular speculation play

Careful, pre-construction condo investors. Lenders don't like funding assignments

Readers of Mortgage Broker News will be all too familiar with the pitch from realtors who specialize in pre-construction condo sales: Put down your deposit, sit back and watch as that piece of paper appreciates faster than any completed condo unit in the city. Don’t worry about paying those exorbitant monthly maintenance fees, either. You don’t even need to keep the condo; you can just flip it at its new value and walk away with a pile of cash.

There was a time when condo assignments were relatively easy feats, but those days are over. Pre-construction investors considering this classic, once tidy speculation strategy need to understand that assigning a condo unit to a second buyer is no longer the slam dunk it once was.

The reason is simple enough.

“The bank’s not going to finance it at the appraised value,” says Anthony Venuto of InTouch Mortgage Solutions. “They’re going to finance at the original purchase price – and not a dollar more.”

That’s a cold, hard dose of reality for both sides of the assignment equation.

Assume a pre-con investor purchased a condo in Vancouver for $600,000 in 2015. At time of completion in 2020, the unit is now “worth” $900,000. She finds a buyer who is willing to put down a deposit based on the new assumed value. The second buyer then goes out in search of financing, only to find that no lender he can find will fund the deal based on the new price.

The new buyer is stuck. He can’t come up with enough money to cover the difference between the current purchase price and what the bank will lend. And because a condition covering such a situation wasn’t baked into the agreement he signed with the seller and her lawyer, he could potentially lose his deposit.

The original purchaser is also in a fairly nauseating situation. Rather than quickly finding a buyer for what she feels is a hot piece of real estate, she is left once again looking for someone to take the property off her hands. While she does, she will need to assume the carrying costs for a property she never intended on keeping. 

According to The Mortgage Trail’s Jerome Trail, assignments were a far smoother proposition for investors six or seven years ago, when pre-construction units in the GTA were selling for around $200,000 and being assigned for approximately $300,000 upon completion. 

“In the beginning,” Trail says, “we could get them done. They would look at a $300,000 Agreement of Purchase and Sale and we would get the 80 percent loan-to-value.”

But within a year of the assignment boom, lenders slammed on the brakes.

“They began asking, ‘What exactly is the collateral here? The condo corporation has not registered. All you really have here is a piece of paper, and our mortgage is really not registered against anything, so we can’t do these anymore,’” Trail says.

Pain in the assignment

For assignments to take place today, Trail says sellers are required to get their builder or developer to agree to the assignment and to provide the original Agreement of Purchase and Sale. End-buyers will likely need to test the alternate lending space

“There are maybe only two banks that I know of, personally, who are doing assignments,” Venuto says.

Trail says alternative lenders like Home Trust may provide 70 to 75 percent of the new valuation, but the appraisal will be based on the opinion of the company’s own appraiser, not the market, and will therefore, as he puts it, “be conservative in nature”.

Lending on assignments becomes even less attractive in an environment where condo inventory is increasing and values are softening, a novel situation most condo investors didn’t see coming. For a variety of reasons – remote work that has made costly downtown living less necessary, extended lockdowns that have made condo life feel more like prison, the evaporation of short-term rental profits – COVID-19 is drinking the milkshake of Canada’s big city condo investors.

“Is it going to last two weeks? Is it going to last six months? Is it going to last two years? We don’t know,” Trail says. “All of a sudden, we have an asset class that’s no longer appreciating. The assignment sale problem is just going to increase if the values continue to come down.”

Because so many first-time buyers get their feet wet in the condo space, Trail says many of them may not know that they are involved in an assignment until it’s too late and lenders are shaking their heads “no” in unison. He says he asks his condo clients to show him a broker version of the MLS listing before an offer is placed “so we’re ahead of that curve.”

Because Canada’s single-family market has shown no sign of cooling, the condo space will likely become increasingly attractive to buyers priced out of the detached and attached sectors. With so many pre-construction buyers looking to assign their properties before their values erode, and so many realtors encouraging buyers to waive any and all conditions, Trail says it’s imperative that brokers step in to ensure their clients exercise extreme diligence before putting in an offer on new condos.

“If you’re not on top of it up front, you’ve got a whole slew of problems,” he says. “The bottom line is, there are so many things stacking up against these transactions that I barely know where to start.”