BC REAL ESTATE: SHADOW FLIPPINGJul 11 2016
If you live in BC’s Lower Mainland, you’ve likely heard about the controversial real estate practice of “shadow flipping”. But what is it and how does it affect you? In a typical transaction, there’s an assignment clause that lets the buyer of a home transfer or sell his or her interest in the property before the actual closing date. In essence, a realtor can “reassign” (flip) the sale of the home to other owners at an increased price.
So who benefits from shadow flipping? Those involved in the deal, usually the middleman who arranged it and the real estate agent who realized a commission every time the property changed hands. Subsequent buyers also benefit, since they make money every time the home is “sold” before the closing date. Who loses out? The original seller because they receive less than what their property may be worth and they still have to pay the land-transfer taxes once the deal is closed. The successful buyer would also lose out because they end up paying an inflated price.
Up until May 16th of this year, shadow flipping was common but perfectly legal in British Columbia. That changed when the provincial government announced new rules aimed at ending the practice. All property offers prepared through licensed realtors will now be required to include two distinct terms that address contract assignments in a pending transaction:
- Consent of the seller to transfer the contract to another buyer must be obtained;
- Any profits from a contract change must go back to the original seller.
It’s important to note that if a buyer wanted to remove these terms from an existing offer, the real estate agent would have to notify the seller. In such circumstances, the seller should get independent professional advice to better understand how this will affect them and to find out what other options might be available.