How do I protect my home sale from Shadow Flipping?

by Richard Morrison
July 1, 2022
News
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Vancouver’s shadow-flipping has been a hot topic in the media in British Columbia, Canada. But are you at risk? This guide explains the facts.

You may be wondering how to protect your home sale from Shadow Flipping, a practice that has made headlines across Metro Vancouver. Shadow flipping is the practice of selling one property to a new buyer who then takes over the rights to that property. While shadow flipping is no longer a perfectly legal practice, it is important to note how it happened in The Lower Mainland: often with the new owners of the property taking advantage of the sale process to make more money than the original seller.

As a seller, you must be aware of shadow flipping and the laws regarding it.

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Key Takeaway

To safeguard your Vancouver home sale from shadow flipping, implement an anti-assignment clause, collaborate with a trustworthy real estate agent, and stay updated on local real estate regulations and requirements.

Understanding “Shadow Flipping” in Real Estate

An assignment is a sale transaction in which the original buyer of a property (the “assignor”) allows another buyer (the “assignee”) to take over the buyer’s rights and obligations under the Agreement of Purchase and Sale. This happens before the original buyer closes the deal on the property, that is, takes possession of the property. The seller’s assignee is who closes the deal on closing date.

An assignment, from the perspective of the original buyer, is like selling the property before the new owner takes possession.

The Impact of Shadow Flipping on Vancouver’s Housing Market

Typically, a homebuyer will sign an agreement of purchase and sale with one vendor. This means they agree to buy their house at some point in time for a certain price. However, before that final real estate transaction takes place-before they take possession of the property-the original buyer allows another person (known as “assignee”) to take over his rights under this contract or allow them to be released from closing on these terms if the assignor has found someone who is willing pay more than what was originally agreed upon by both parties involved in negotiations.

The assignment practice could increase the prices of the real estate market with subsequent home flipping. Real Estate agents or other broker can also be involved in the second transaction.

This is not a new practice. However, it has been in place for decades.

Exploring the Legality of Shadow-Flipping Practices

This is perfectly legal. It was actually happening so often under the table during the last condo boom, that an assignment clause was added to contracts. There are many regulations and rules regarding contract assignment. These rules have been developed over many years by the Real Estate Council of BC as well as the real estate industry. Agents who don’t follow them will face severe penalties.

Here’s a troubling question. Why didn’t the original sellers get $1.4million for our property, even though it is valued at $1.4million? This could be due to one of the following reasons:

These house prices are really on the rise. However, this is not the case in our current market. It’s possible for house prices to rise by 20 percent per year, but not per monthly.

Original vendors wanted to sell quickly so they priced it low in order to make it easy to sell. In this case, real estate contracts could be sold for a higher amount.

Original vendors were deceived into thinking they could only get $1million for the property by an unscrupulous agent. This was in order to sell it at a low price once or twice.

This last phenomenom – which is rare, but does occur – is what is of concern and is the subject the Globe and Mail investigation on investors practicing this method.

This agent could have two types of vested interests:

They may be doing it because they know they’ll get multiple commissions for multiple sales. This is better than getting a smaller commission on one sale.

Or worse, the real estate broker could be the third buyer, making the entire flipping profit by selling it to final Buyer C.

This is when the perfectly legal practice that contract assignment can become something illegal. It is illegal for any realty agent to not act in the client’s best interests . Listing agents are required to get the best price possible for vendors. It is illegal for them to persuade original vendors to sell below market price to facilitate a contract assignment.

Identifying the Problem with Shadow Flipping Practices

Agents can assign a contract to multiple properties at increasing prices and create many flips. They also get a commission for each transfer. The difference between the price paid and the resale market value is also a benefit for the buyers in the middle. The entire transaction takes place before closing, meaning that the property is technically never in the buyer’s possession.

Analyzing the Consequences of Shadow Flipping in Real Estate

The original seller gets less than the property’s final value and the end buyer might be paying a higher price with the difference going to the agent and the buyers in between.

A Hypothetical Example: Understanding Shadow Flipping Scenarios

The client of a real estate agent negotiates a deal to buy a property from an initial buyer for $1million. The agent takes the contract and resells to another buyer for $1.5million. The agent then sells the contract to a third buyer for $1.8 million.

The agent is paid a commission for each transaction. The agent receives $1 million, plus the commission. 500,000. The $500,000. is paid to the first buyer who purchased the property contract for $1 million and then sold it for $1.5million. The $300,000.00 second buyer, who purchased the contract for $1.5million and then sold it for $1.8million, gets the contract. The $1.8 million purchase price is paid by the third buyer.

Addressing Tax Avoidance Issues Related to Shadow Flipping

The CRA is an honor system. The person who sells the assignment contract is the assignor (as a speculation). They are required to report the proceeds, or “the lift”, to CRA under capital gains provisions. 50% of the profit should be treated as business income. The B.C. and Canadian honour system requires that people report any profit they find out. Avoidance of Property Transfer Tax is also an issue.

Protecting Yourself from Shadow Flipping: Tips and Strategies

The vast majority of real-estate agents are honest, ethical, and law-abiding. There are always some bad seeds in any profession. The local real estate boards as well as the Real Estate Council of BC work hard to remove them quickly. Home owners need to be aware of these bad seeds and protect themselves from them.

If you are selling your house, the easiest way to do so is toRequest a no-assignment clause for your sale contract. This is your right. You should inform any listing agent you are interested in hiring you. This will ensure that you are not a pawn looking for easy wins.

If the market is moving very fast and you cannot find an agent who will be willing to include this clause in your purchase contract you need to be careful. This is just like you would when you hire someone to perform their professional services. These are some guidelines.

Do not just choose the first agent you meet, or the one that knocks on your house, telling you they have a buyer. Before you give anyone the listing, get recommendations from trusted people.

Ask the agents to tell you the price they would list your house at. Also, make sure that you have done research on similar properties in your area. Are you being told by the agent that your home isn’t worth as much as one of your neighbors? Are you being offered a discount in return for selling your property at a lower price? Or are you being encouraged to sell quickly or start a bidding battle? These are red flags.

Ask them how much they think the property will sell for in a few months and if there are any chances of it being flipped by a real estate investor. If they answer yes, tell them that you are willing to list at a higher price. This extra money should be paid to you and not to an investor.

Ask agents to show you their marketing plans to help you get the highest price possible for your home. This includes listing photos, marketing materials, and open house strategies.

You’ve done everything you could to find the best real estate professionals who will represent your best personal interest during their real estate services. Accepting an offer you are happy with and worthy of your home is a good thing.

Incorporating Shadow Flipping Clauses in Contracts: Potential Advantages

A clause in the standard MLS contract for purchase and sale allows you to reassign a contract. It doesn’t need to be included in the contract.

Each standard contract that is used via the web forms and by extension through CREA, Canadian Real Estate Association, and BCREA (BC Real Estate Association), are inherently assignable. This Clause 17 is called Plural. It is used to state that a party (including many definitions and assignments) is in it. Is it possible to take that out? Anyone with a contract on them should ask themselves if they would have got the money they received without it. Are you lowering your market value by offering fewer options for the property or reducing its value? Strawhomes.com believes that it lowers the contract’s value.

A clause in a contract could be considered an asset.

The assignment clause can be removed, meaning that the contract cannot be assigned unless both parties agree. The commodity is of lower value. The assignment costs are reduced by not having to pay extra tax. Without assignments, people will still flip houses. You may also face lawsuits or foreclosures if they don’t complete their deals.

It’s the current trend and the market supports it. The market is not to be criticized. Grab some and keep it. Sit down, get in, and then keep going.

Summary

Contract assignments are legal and should be treated as such. Any buyer who is unable to complete a home purchase should have a means of assigning their contract. The practice does not cause property prices to rise in Vancouver. It is only that there are buyers who will pay the final price that can drive up property prices.

Update: New B.C. New B.C. real estate regulations put an end to shadow flipping

The province has implemented new regulations in real estate that target shadow flipping especially by foreign buyers. This is a practice the government considers “unethical” as well as “predatory.”

Shadow flipping is a practice whereby a realtor sells a property for more money before the contract closes. The government has ordered that the agent obtain the permission of the sellers to transfer the contract.

Any profit earned from the transfer must be returned to seller.

These new rules allow prospective buyers to request that terms be removed from an offer. However, the seller’s agent must notify them. Sellers reserve the right to refuse the offer. The real estate agent for the seller must discuss with clients whether or not the property can be assigned and whether or not they are entitled to any profits.

Mike de Jong, Finance Minister, says contract assignments are necessary but that the new rules are intended to protect those who sell their property.

He says that the changes made enable sellers to be fully disclosed, informed and consented to by giving them the chance to claim any financial benefits.

These regulations became effective on May 16, 2017.

Sources:

https://www.theglobeandmail.com/real-estate/vancouver/bc-unveils-rules-to-ban-shadow-flipping-in-real-estate-market/article29955003/

https://globalnews.ca/news/2510453/what-you-need-to-know-about-shadow-flipping-in-vancouver/

Keep Reading:

Below is how property flippers would engage in shadow flipping before BC slammed down the practice:

Understanding Shadow Flipping

Shadow flipping differs from the standard practice of house flipping because no renovation work is performed on the property. Instead, shadow flipping is about purchasing undervalued properties and quickly reselling them at higher prices.

Legal Aspects

First, it’s important to understand that shadow flipping, while potentially profitable, is also controversial and can be legally complicated. Before engaging in shadow flipping, consult with a real estate attorney who understands the laws in your area.

Steps to Shadow Flip a House

Find an Undervalued Property

The key to successful shadow flipping is identifying a property that is undervalued. This requires a keen understanding of the condo selling market in your area.

Conduct a Thorough Property Analysis

Once you’ve identified a potentially undervalued property, carry out a thorough analysis to confirm its potential. This can involve hiring a home inspector or a licensed contractor who can identify any hidden problems with the property that may affect its value.

Secure Financing

Shadow flipping requires financial agility. You’ll need to secure financing that allows you to purchase the property quickly and pay it off when you sell it.

Make an Offer

After securing financing, make an offer on the property. Remember, your goal is to sell the property for more than you purchased it for, so negotiate the purchase price accordingly.

Enter into a Contract

Once your offer is accepted, you’ll enter into a contract to purchase the property. This contract should include a clause allowing you to assign the contract to another buyer. This is the key legal mechanism that enables shadow flipping.

Find a New Buyer

After the contract is signed, you’ll need to find a new buyer who is willing to purchase the property for more than you agreed to pay. This can be the most challenging part of shadow flipping.

Close the Deal

Finally, you’ll close the deal by selling the property to the new buyer. The new buyer will pay you, and you’ll use part of that money to pay off your original purchase. The difference is your profit.

Tips for Successful Shadow Flipping

Know the Housing Market

Having an in-depth understanding of your local real estate market is crucial. Know the neighborhoods, their average property values, and upcoming developments that might boost those values.

Build a Network

Establish relationships with real estate agents, other investors, and potential buyers. These connections can give you early access to opportunities and help you find buyers for your properties.

Stay Ethical

While it’s tempting to chase profits, it’s also important to operate ethically. Honesty and transparency can help you build a solid reputation in the real estate industry.

In conclusion, shadow flipping can be a profitable real estate investment strategy. However, it requires a deep understanding of the real estate market, solid financial backing, and strict ethical standards. Always consult with a real estate attorney before getting involved in shadow flipping to ensure you’re acting within the law.

Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.

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