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A condo development in Toronto, on May 19, 2021.Christopher Katsarov/The Globe and Mail

As tens of thousands of people opt to plunk down deposits and sign contracts to buy a condominium unit before construction has begun, those close to the industry say many of those have no intention of ever buying the finished product.

“A lot of people are buying on the assumption they are going to assign,” said Sundeep Bahl, salesperson with Re/Max Real Estate Solutions, referring to the unregulated market where buyers sell or flip pre-construction contracts to another party. “As soon as they sign up their first question is: ‘Is there an assignment clause?’ A lot of people are just speculators in the market,” he said.

That’s a conclusion many who are close to the pre-construction market have reached, but unlike public markets for stocks or bonds, there’s no data available to study how this market performs. Builders keep their own assignment records, most of the transactions are done in private, and there’s no government regulations to collect or analyze these contracts.

“I know people who are buying 50 and 20 [pre-construction condos], they are going to assign them,” said David Feld, a real estate lawyer and entrepreneur who works with the True Condo Team, who specialize in pre-construction condos. “I’ve done it twice myself [flipped an assignment] and I have three more coming … three I’ve given deposits on.”

The Canada Revenue Agency has done spot checks on assignment sales because profits from flipping an assignment are subject to tax. In 2016, the CRA ran an audit of condominium buildings and compared the initial sales records with persons who eventually bought the units. Among 69 projects it found 2,810 contracts that were flipped.

Most pre-construction contracts bar owners from advertising an assignment sale on a real estate multiple-listing system. So even though there are more than 50 assignments currently for sale in the Toronto Regional Real Estate Board listing, that’s believed to be only a small fraction of the total assignments available.

“Anecdotally, a rising share of investors have been purchasing presale condos recently, with the expectation of assigning rather than holding for rental due to quickly accelerating prices and lower expected rental cash flow,” said Shaun Hildebrand, president of market research firm Urbanation Inc.

Mr. Hildebrand said the costs of new-build condos are rising more quickly than the rental rates the traditional investor model relies on to pay off any mortgage. Urbanation’s Toronto-area data shows the price per square foot has increased 25 per cent in the past two years to $1,324 by the end of 2021. To cover carrying costs once built – assuming a sub-4 per cent mortgage rate and a 25-per-cent down payment – a condo investor would need to charge $6.25 per square foot in rent. Right now, newly built condos rent for an average $3.50 per square foot, which is 80-per-cent lower than break-even. While rents for condos in downtown Toronto rose 15 per cent in 2021, the regional average was closer to 10 per cent.

Not that the widening gap between purchase price and carrying costs has slowed down buying activity. “Baker Real Estate has launched 10 buildings so far this year,” said Barbara Lawlor, CEO of Baker Real Estate Inc., which specializes in selling pre-construction condominiums for developers. “It’s intensely busy and we’re in a time where demand is exceeding supply.”

But Ms. Lawlor said she believes most buyers will buy and hold the condos: “The flip word isn’t really in our language. … That word has not been used in a typical conversation.”

More than 30,000 pre-construction condominium units were sold in 2021 – the second highest total ever recorded in Ontario (after the wild market of 2017 that saw 31,216 units sold). That’s up 69 per cent from 2020′s 18,000 units. Mr. Hildebrand said that, anecdotally, purchasers who ultimately assign their contract to another buyer before construction closes run at about 10 per cent of all units sold. That means, if the typical ratios hold, more than 3,000 of the condos sold in 2021 may have been purchased by someone intending to sell the assignment.

“January and February it was extremely busy, we did 8-10 [assignment flips] in one month,” Mr. Bahl said. “Some of those people were making $200,000 to $300,000 more than what they paid.” But Mr. Bahl warns that anyone buying today may not find the same pot of gold if the market cools. “If they assign in the next two-three years, are they going to be able to make $300,000 more? That’s an assumption that hasn’t been tested.”

The industry standard is to require a pre-approval mortgage letter from a major bank to go along with a purchase. This requirement serves two purposes: it weeds out investors or speculators without a strong financial footing and provides a construction-lender assurance that the pre-sold condo units have a real person behind them. But some in the industry doubt the value of such safeguards.

“They are not worth the paper it’s printed on,” said Mr. Feld, suggesting that a mortgage approval can’t be relied upon two to five years later when it comes time to finalize a purchase. By then, the buyer’s circumstances may have changed; lending rates may have changed; even the purchase price of the unit may have changed. What’s more, some in the industry say it’s possible to get mortgage letters from multiple banks, or even the same bank for multiple units, leaving the question of how the buyer will pay to a later date.

Mr. Bahl said he flipped assignments for condos bought for himself, after realizing he wouldn’t be able to close on them all.

“I think presale investors today likely have a shorter-term mindset than in the past, but don’t pose a systemic risk for the market,” said Mr. Hildebrand, who argues that condo prices will continue to rise as long as more people continue to want to live in the Toronto region. Assignment flippers are also subject to an array of extra fees that can range between $5,000 to $25,000 to complete a flip. That often means the contract needs to have achieved price appreciation greater than 30 per cent for it to pay off. “They are contributing to the excessive appreciation we are seeing, which certainly has a risk of correcting in the short-term.”

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