At the Molinaro Group, pre-construction assignments for its condominium properties have never been offered. The developer believes that restricting assignments creates a more stable environment for its purchasers while offering a more level playing field.
Much has been written about the rising cost of GTA homes and condos in recent years. Real estate investment speculation has contributed to this trend, in part, with pre-construction assignments.
This is a condo purchase where investors put a minimum down payment on an unbuilt condo unit and, before even completing their own purchase or taking possession of the unit, they assign the right to sell the unit to another buyer.
This business model works well for the initial investor when real estate were prices are almost constantly rising. They “buy” a unit for lower prices, sit on it while prices rise and then unload the unit at a profit. The practice has been a driver of rising condo prices and a big motivator for investors who, according to Statistics Canada, own close to 40% of all condos in Toronto, and at even higher percentages in some smaller markets.
Governments’ Efforts to Control Condo Costs
All three levels of government have taken steps to slow the increase in housing prices and have targeted the assignment practice. For example, the federal government has imposed anti-flipping rules, which taxes 100% of the capital gains on a property sold within one year of its purchase. It has also imposed a two-year moratorium on foreign buyers’ ability to buy residential real estate. The Canada Revenue Agency (CRA) also has instituted new rules requiring real estate investors to pay HST on profits realized from pre-construction assignments.
In Ontario, the government increased the non-resident speculation tax (NRST) last year that applies to certain foreign buyers of Ontario homes. Meanwhile, several municipal governments – including the City of Toronto – have imposed a vacant home tax.
As of February 3, 2023, owners of unoccupied homes must pay 1% of its market value if they do not qualify for the exemption.
On an even broader scale, the Bank of Canada, in its efforts to wrangle inflation, has raised interest rates several times over the past two years. This has made it more difficult for real estate speculators to prequalify for loans and acquire the funds required to close a deal on investment properties.
Impact on Pre-construction Assignments
Reactions to these government policies and their effectiveness in restricting real estate speculation have varied. There has also been debate on how these rules will affect pre-construction assignments, which were believed to be primarily responsible for the rapid growth in sales and prices in the condo market through most of 2021. However, according to a recent Globe and Mail article, new condo sales in the GTA dropped by 79% in the third quarter of 2021, which has greatly reduced pre-construction assignments.
“The popularity of assignments can only be sustained when prices are going up consistently,” said Linda Davies, Broker of Record, Davies Condos. “The third-party (VIP or Platinum) brokers selling new product tend to demand high commissions and first access to the choice product which also has put an upward pressure on prices. In today’s market those brokers will be scarce… and their existing client base, who bought in the boom, will likely have trouble closing deals and/or reselling.”
No Pre-construction Assignments with Molinaro
Pre-construction assignments are uncommon in Burlington. At the Molinaro Group, pre-construction assignments for its condominium properties have never been offered. Even though its properties attract many eager buyers, investors know they have to close on their purchase, and must be prepared to do so when the time arrives.
Molinaro Group’s position on not providing or supporting pre-construction assignments helps preserve end user and long term investor values by discouraging and virtually eliminating this flipper action. Allowing assignments prior to closing can undermine prices when these units flood the market just before closing. The Molinaro Group believes that by restricting assignments it creates a more stable environment for Its purchasers while offering a more level playing field. And the developer supports its buyers through all steps of the purchasing process. This includes post-sale care through the Molinaro Group Customer Care Program and rental support through Davies Condos, Molinaro’s exclusive broker for the sale and leasing of its properties.
“We do things differently at Molinaro, long before any government rule changes were imposed on assignments,” said Vince Molinaro, President, Molinaro Group. “We believe in transparency and fairness, which is part of our commitment to ensure our customers get the best product and service for the best price.”