In hot urban markets like Vancouver and Toronto, shadow flipping, a complicated and shady practice that until recently has been legal in Canada, is becoming more and more commonplace. Because real estate contracts typically include a clause that they are assignable, a contract can be assigned from one party to the next as many times as is desired before a deal even closes.
The Globe and Mail recently published an article and helpful infographic that explains how it works – we thought we’d share:
Shadow flipping ultimately results in the original seller receiving far less than what their property is actually worth, the last buyer buying the property at an overly inflated price, lenders financing over-inflated mortgages and real estate values ballooning in a market that some economists continue to question. The tax man loses on taxes on the property transfers in between, and the real estate sales professionals are the ultimate winners because they earn commissions as many times as the contract is assigned before the final deal closes.
This has caught the eye of governments across Canada and has led to law suits.
As recently as May 2016, a lawsuit was filed in the B.C. Supreme Court alleging that 60 property owners in BC had fallen victim to a shadow-flipping scam by a local realtor and his brokerage firm (http://vancouversun.com/news/local-news/lawsuit-alleges-60-property-owners-in-richmond-fell-victim-to-shadow-flipping-scam). In the same month, it was reported by CBC that B.C. Finance Minister Mike de Jong has announced new rules directly “aimed at ending the controversial practice of ‘shadow flipping’”. The new rules will eliminate the means for anyone but the seller of a house to profit from real estate contract assignments. In the article, shadow flipping is cited as one specific cause of steady increases in property values in B.C. The B.C. government has also expressed interest in gathering data to track how much of the investment in these properties is coming from foreign entities.
This practice can also have adverse effects on lenders as when there is mortgage financing, they are left holding the bag on the mortgages that may have a weaker equity position than originally stated. This makes it more critical than ever for lenders to do their homework, not just when investigating the value of individual deals that they are working on, but also when looking at neighbourhoods and regional property values on a macro basis, leveraging tools like automated valuation models.
With shadow flipping under the microscope and so many impacted across the country, it leaves one wondering whether or not Ontario and other provincial governments will follow B.C. in pursuing regulations to protect buyers and sellers. It seems that in these transactions there are few winners. This practice has the ability to rock real estate markets across the country.
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Find out more by visiting https://lenders.purview.ca/.