By now you’ve probably heard of “shadow flipping.”
The controversial real estate technique was uncovered in a bombshell Globe and Mail investigation this weekend, and has renewed the debate over what’s driving housing prices in Vancouver.
It allows realtors and investors to flip a property multiple times before a sale is even complete, jacking up the price along the way.
But it’s a somewhat obscure and technical process – how does it actually work?
Today, Kathy Tomlinson, the Globe and Mail journalist who led the investigation, joined Lynda Steele to break down just what shadow flipping is, and how it works.
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So how exactly can a home be flipped multiple times before the deal has even closed?
Tomlinson says the whole thing revolves around a process called “assigning.”
Essentially, if a person decides to sell their home, the buyer has the right to “assign” the contract that is, to sell it, to anyone they want between when the contract is signed and the deal closes – before any money has even changed hands.
“So lets say I sell my house to you. And then you decide for whatever reason you actually don’t want to buy it after all, or you want to make some money. You or your realtor in many cases might find you a buyer to take your contract. And you assign it to them, but they pay more.
So I’ve sold my house to you for $2 million, they purchase the rights to the contract for $2.3 million. And then there’s another transaction maybe, where another buyer shows up – all of this is before the closing. The second buyer then says okay, I’ll assign it to you for $2.6 million.
And then the closing time comes, and the very last buyer in the chain then has to pay you $2 million as agreed. That buyer also has to pay your second buyer $300,000, and the next person in the chain $300,000, and the end buyer pays $2.6 million for the property in all.”
It’s not illegal. And Tomlinson says we don’t even know how often it’s happening, because there are no records. These are all private contracts.
“I do know though anecdotally that there is a particular subset of the industry where their primary pool of buyers are foreign, or relatives of or agents of foreigners, and it has become a business model for some of the lesser known brokerage firms and for many realtors who deal with clients in those high end properties they’re looking for.”
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In the dark
Tomlinson says in many cases, the original sellers are in the dark.
She says realtors only have an obligation to tell sellers they have an interest in the deal if they are representing the seller, not the buyer.
“Even if you’re personally involved, which in some cases realtors are – they’re not only facilitating these deals, they’re personally investing – they don’t have to tell the original seller – they only have to tell the person they’re buying the contract from. And in reality on the ground, many times those people are all in this together. They’re insiders, they’re speculators all jacking the price up. So of course they all know who each other are.”
And she says a legal loophole means even if they do represent the seller, they can get in without telling them if they invest after the original deal is inked.
Tomlinson says the government will still take transfer tax on the full final amount ($2.6 million in the case outlined above), but each of middle men in the process escape without paying an extra dime.
She says doing something about this would require legislators to draft a new law.
What are sellers to do?
So what should you do if you’re selling, and you’re worried you’ll get less than your home is worth because of an unscrupulous realtor?
Tomlinson says there’s a very simple solution.
“You can do something about this if you’re a seller. And that’s very simple, and that is to make sure when you are selling your home to insist on a no assignment clause in your contract. Now there’s one sort of caveat here, and that’s that’s that maybe the person who was going to buy your place and then flip it through assignment is no longer interested. But in this market, maybe you’ll find another buyer.”