In 2016, the media was abuzz about a practice being deployed by some real estate sales professionals, a practice which has arguably contributed to the driving up of real estate values in Canada. This practice is called shadow flipping.
Until now, shadow flipping has not been an illegal practice but has been controversial because it involves the assigning of a real estate contract, sometimes several times, between the initial date there is an offer on a property and the closing date. With shadow flipping, each time the contract is sold or assigned, the property is again sold so it often involves a higher sale price. With each sale, the real estate sales professional receives new commission.
Why is this an issue? Because the property is sold over and over again before the actual official closing date, the buyers don’t pay land transfer taxes. The end result is that the original seller receives less than what the property ends up being worth and the end buyer ultimately pays an inflated price. This is not to mention the fact that the government ends up losing on the land transfer tax.
When the media flurry occurred last year, the B.C. government initially announced new measures to change/end the practice of shadow flipping, but then the subject sort of dropped off the radar – until now.
A few weeks back, the Ontario government announced housing reform measures which included 16 changes to address issues from rent control, to creating more housing, to the introduction of a new foreign buyer tax – all of which are intended to cool the very hot housing market.
Another thing that was included in the announcement that hasn’t garnered the coverage that some of the other reforms have deals with the issue of shadow flipping. While shadow flipping may have temporarily fallen off the media’s radar, it certainly hasn’t fallen of the Ontario government’s.
This remains highly relevant. In Ontario, it is somewhat common for people to buy pre-construction homes and then those homes are being sold multiple times before they’re even built, a slightly different scenario than the one playing out in B.C.
With these new reforms, the Ontario government plans to work to understand and tackle the real estate practice of shadow flipping and look at the rules that apply to real estate sales professionals in this regard to ensure that consumers are being fairly represented.
This appears to be a win-win for all, including you.
Being that the concept of shadow flipping can inflate a property’s value, it is critical to have your own tools and resources in place to validate a property’s value. While you likely deploy appraisals and your own methods to determine property value, automated tools like automated valuation models enable you to do this more economically and with greater speed.
What do you think about the Ontario government’s plan to review and potentially regulate or even put a stop to shadow flipping? Join the conversation on Twitter @purview4lenders.
For more information about automated valuation models please visit https://lenders.purview.ca/.