'Shadow Flipping' Not Limited To Vancouver Real Estate Market

Imagine your realtor sold your home for $500,000 more than the price you agreed to — but you didn't see a penny of that extra cash. That's the situation for some Vancouverites, as exposed in a Globe and Mail feature Saturday.

A controversial sales technique called "shadow flipping" allows realtors to score two or even three times their standard commission on a single house by reassigning the sale to different owners at ever higher prices. But it's a practice that has left the original sellers feeling scammed.

How does it work?

An increasing number of real estate transactions in the Vancouver region feature what's called an "assignment clause," which allows the buyer to transfer or sell his or her interest in the property before the closing date.

Some savvy realtors use this clause to essentially sell the same house multiple times over, allowing them to make multiple commissions off of one house.

For instance, the realtor could find an investor (Buyer #1) willing to purchase the seller's home for $2.5 million. Buyer #2 then buys the contract for $2.8 million. Finally, Buyer #3 purchases the contract for $3.1 million.

At closing, Buyer #1 and Buyer #2 each make $300,000 in profit. The realtor earns three commissions, one for each transaction. The buyer only gets the original $2.5 million (less the commission on that amount).

The middlemen flippers pay income tax on their profits, but they pay no land-transfer taxes.

How widespread is it?

According to Don Campbell, founding partner and senior analyst at the Vancouver-headquartered Real Estate Investment Network, assignment-clause schemes are nothing new. And they're not exclusive to Vancouver, either.

Campbell says that this kind of strategy has been seen in Calgary and Edmonton when they were hot markets, as well as in Toronto.

"In Toronto, what you see a lot of is people who buy pre-built condos and then sell them at a profit before they even take possession of them. This is just another version of that."

Is it legal?

It may be controversial, but it's completely legal both in B.C. and in the rest of Canada. The assignment clause entitles the buyer to pass on the home to another buyer, and there's no law preventing the listing realtor from facilitating these sales.

It is possible, though, that the practice violates Real Estate Council of British Columbia regulations. According to the organization's Professional Standards Manual: "The general rule, in the absence of wording in the contract to the contrary, is that buyers may assign their rights under the contract as long as they do not prejudice the rights of the sellers."
Original Article
Source: huffingtonpost.ca/
Author:  CBC