Shadow flipping = a complicated and scary process that provincial governments are lifting the veil on and calling into the spotlight.
How does shadow flipping work? Basically, when a property is listed for sale, the buyer has the right to ‘assign’ (this can be through selling the contract) to another party in between when the initial offer (contract) is made and before the deal has officially closed.
Since the assignments are essentially private contracts, there are no automated records of the assignments as there would be had the property been sold 2-3 times with formal closings.
- Person number 1 sells their property to person number 2 for, let’s say, $500,000.
- Person number 2 assigns the contract to person number 3 prior to the closing date for $600,000, essentially buying the contract for $100,000.
- Person number 4 comes along and buys the contract through another assignment from person number 3 for $700,0000.
The means that the original seller will never see the real market value of their home and often the only winners in these deals are the real estate sales professionals – but some sellers are now fighting back. In July the Globe and Mail reported on two brothers who filed suit against a B.C. real estate firm for shadow flipping their property. Read more about this here: http://www.theglobeandmail.com/news/british-columbia/two-brothers-file-shadow-flipping-lawsuit-in-bc/article30878703/.
This practice has become so common an occurrence in B.C. that government officials have gone as far as to call the practice greedy and have announced plans to introduce regulations to restrict the practice of shadow flipping.
Apparently the new regulation will apply only to real estate sales professionals. The regulation will not seek to completely ban contract assignments, but it will require more disclosure and assurance that the seller consents to the arrangement, thus providing them with a certain level or protection for those looking to take advantage of them.
While B.C. has made news on this subject and is clearly taking steps to protect home sellers, the problem is not limited to the west coast. The CBC recently reported that the practice has also been seen in other hot urban markets including Calgary, Edmonton and Toronto. In Toronto specifically, it has been especially prevalent in the pre-construction condo market. Read more about his here: http://www.cbc.ca/news/business/shadow-flipping-real-estate-1.3440824.
Is shadow flipping here to stay? What are your thoughts on this topic? Join the conversation.
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