The city council, which currently owns the land at Sansome Walk in Worcester, announced the decision to sell the site following a fresh open competitive procurement process.
Sanctuary previously looked set to take over the site under proposals for a development of 76 new homes, which went through consultation with local residents.
Under the new plans, the Worcester-based housing provider is looking to build 40 affordable housing units on the site, subject to planning. It has a £10m contract from the council.
Last year the City Council appointed DSM Demolition Limited to demolish the former Swimming Pool and remediate the site for development. The City Council will meet the cost of that work, which is expected to cost £2.64m and will be supported by a grant from central government's Land Release Fund.
David Soothill, Sanctuary's director of development for England, said: "We are delighted to have been selected as the development partner for this important site in the heart of Worcester. As a major investor and employer in the city, we have always maintained a keen interest in the site and believe this new proposed development will be a great addition of much needed high-quality affordable housing for the community."
Sanctuary intends to submit a planning application by early summer, with demolition of the existing building due for completion in the autumn, Worcester City Council said.