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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Wow. Those crazy kids up in Canada are at it again. Those real estate agents. What a bunch of chuckleheads they are up there!
Get this. 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 that some Vancouver residents are finding themselves in.
The sales technique is – SURPRISE! – considered “controversial.”
As unbelievable as it sounds, doing this allows agents 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.
One article stated that “it's a practice that has left the original sellers feeling scammed.’ Yeah, ya think?
So how does this Shadow Flipping thing work?
Well, 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 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 seller 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?
Assignment-clause schemes are nothing new. And they're not exclusive to Vancouver, either. This kind of strategy has been seen in Calgary and Edmonton when they were hot markets, as well as in Toronto.
In Toronto, for example, you see a lot of 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 Shadow Flipping.
Is it legal?
It may be controversial, but it's completely legal both in British Columbia and in the rest of Canada. The assignment clause entitles the buyer to pass the home on 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."
What effect does it have on the housing market?
Shadow Flipping obviously negatively affects both the seller, who receives less for their property than they could have gotten, and the final buyer, who's paying an inflated price.
But when it comes to the larger housing market, though, it appears that the effect is negligible given that it’s a relatively small niche.
What's being done about it?
In the wake of the recent media attention, a member of Vancouver’s legislative body, David Eby is calling on the B.C. government to appoint an independent investigator who will hold an inquiry into real estate regulation.
Meanwhile, the city's mayor, Gregor Robertson, has proposed the province put a tax on speculators.
In true government form, in addition to looking at more regulations and taxes, the government is also suggesting that a blue ribbon panel be put together to study the issue and report back.
Yeah right.
It’s funny how much real estate agents hate wholesalers and investors in general, until of course they can use the same techniques to put a few bucks in their own pockets.
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What’s your take on this Canadian Shadow Flipping? Share below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.