There are three ways to buy a condo these days in Toronto, Mississauga, K-W, Kingston or other urban areas in the most populated swath of the country. (a) You line up, camp out or weasel your way into sales office and get a pre-sale – securing a unit to be finished in two or three years; or (b) you buy an existing resale from the person who owns it; or (c) you purchase an assignment.
What was once difficult is now commonplace. Developers are smart guys. When they understood real estate had become a speculative commodity like oil, bitcoins or Beyoncé tickets, the builders and marketers started adding assignment clauses into agreements as a matter of course. At first they charged a price – up to five thousand – to include this paragraph. Now, it’s just there. It’s the license to trade, flip, speculate, potentially profit and play the game – suddenly de rigeur in our house-horny world.
In case you didn’t realize, there are realtors who do nothing but trade assignments. Whole brokerages are heavily engaged in them. There are assignment web sites. And just check out Kijiji if you doubt that this thriving marketplace in paper-based real estate exists (click below to enlarge).
On Saturday morning this pathetic blog lit up when scores of people rushed to link a Globe story on the use of assignment clauses in Vancouver. It was kinda cute. YVR takes another step towards maturity, it seems, as the mainstream media catches up to a practice which has been in pace, and functioning, for years.
“Assignment clauses are an obscure but increasingly ubiquitous feature of domestic real estate transactions in B.C.’s Lower Mainland,” the Globe said, darkly, “where feverish real estate prices have triggered a frenzy of buying and selling, and a national debate about the risks of an overheated market and the role of foreign investment.”
Assigning houses works similarly to assigning condos or any other property. A vendor accepts an offer containing a clause allowing the buyer to sell the property again prior to closing it himself. In a hot market rife with speculation, flipping and greed, where listings are scarce and citizens obsessed with real estate, the buyer (who has no intention of closing) is willing to accept the risk involved.
If successful, the buyer (often a realtor with deep market knowledge) is able to sell the offer to a new purchaser for a profit before closing. That second buyer may even be a player, too, who resells the paper to a third party – made easier if the closing period is long (three to six months). So, on the day of closing the original vendor gets his or her cash per the agreement, and yet the ultimate purchaser assumes title, having willingly paid a greater price. Like a futures contract.
Nothing new here. Thirty years ago, in the last Canadian real estate orgy, it was common for a single home to close multiple times on the same day, with the offer to purchase flipped four or six times after the original deal had been inked. (By the way, this kind of activity in the late 1980s also preceded, by just a few months, a market dive which ultimately shaved more than 30% off the value of GTA real estate. It would take 14 years for the average price to recover.)
Assignments increase prices within a market, but are not responsible for the speculative fever which makes their success possible. Realtors who are also assignors may reap more commission on the pass-through, but profits trading clauses do not go untaxed. In fact, CRA will levy capital gains taxes on the profits and possibly HST on the sale price, or worse. Gains made through trading clauses are routinely classified as income, so the flippers are taxed at their marginal rates, without the 50% break they’d get with cap gains.
What the Globe piece did, by not providing any context, was suggest Chinese buyers had found a shady, likely unethical, way to suck up houses from unsuspecting Van sellers through multiple grey market deals. “It’s obscene,” one seller was reported to have said. “I had no idea our house was going to be resold. We were shocked when it was flipped.”
The obscene part, of course, was that the house closed for more money than the first seller received, after the buyer took a risk and resold the deal. Greed has a funny way of pulling the needle on your moral compass.
While assignment-clause sales in Van are a small fraction of those in the GTA, they constitute one more log on the pyre of a stable market. The other day some dingdong paid six figures more than the asking price on the $2.4 million piece of crap featured here in Point Grey. Bidding wars have erupted in the wastelands of Langley, Surrey and PoCo, far from the lights of downtown. In the burbs, realtors are claiming ‘average’ houses are appreciating $30,000 a month. Real estate has gone parabolic, as is always the case when euphoria wins. But it never stays.
The chart look vaguely familiar? Check out the Van real estate board price graph published here in the previous post. Or the Case-Shiller graph of real estate values in major US markets city reproduced below. They thought it was different there, too.
Some things never change, as they result from human nature. But apparently we have to learn them all over again, every few years.