This is the most incredible real estate story I think I’ve ever seen.
And by “story,” I don’t mean the investigative journalism piece that Globe & Mail reporter, Kathy Tomlinson, put together last month – which was incredibly impressive in its own right!
But rather I’m referring to the story that is only just beginning, since the article that Ms. Tomlinson wrote has, within a single month, motivated the Premier of British Columbia, Christy Clark, to enact legislation to change the way properties are bought and sold in the province.
Yes, that story. Absolutely, positively, incredible…
Did you guys see the movie “Spotlight?”
I didn’t see all the other movies nominated for the “Best Picture” Oscar, so while I can say that I thought the movie was fantastic, I don’t know if it was the best film of the year.
But I do know all the stories from the films that were awarded, even without having seen the films, and I think the story contained within “Spotlight” is epic.
Imagine a group of investigative journalists, uncovering something as massive as the sins of the Catholic church, and fighting for years to bring the story to light. Think of not only what they had to uncover, and the roadblocks they had to cross to bring the story into the public eye, but also the affect that their story had, and the change that they helped bring about.
Say what you want about the media, but when something needs to be brought to the attention of everybody in society, they remain the best outlet.
And as technology advances, it’s easier to bring issues to light.
Look at what’s happened over the last few years with law enforcement across North America. For a century, police have been beating suspects for sport, and only in the past couple years, thanks to the fact that everybody has a video camera on their cell phone, we’re actually seeing what’s going on, and holding the accused accountable.
I suppose as with anything else in life, the media can be as dangerous as they can be helpful.
There’s two sides to every story, and there’s the truth, the “truth,” and then many things in between.
But every so often, a story breaks that warrants action, and eventually gets it.
The Globe & Mail journalist, Kathy Tomlinson, broke such a story last month, and now we’re seeing the real estate landscape in British Columbia change as a result.
For those of you that aren’t familiar with the story, let me provide a refresher.
The story, called, “The Real Estate Technique Fueling Vancouver’s Housing Market” appeared online and in print via the Globe & Mail on Saturday, February 6th.
But this wasn’t just any “story” in a newspaper. It wasn’t a “report” so much as it was an investigation, and reading the story, you have to think Ms. Tomlinson spent several months, and thousands of hours looking into this.
The story was 4,000 words, multiple pages, and contained a dozen photos of the people involved, and graphics and illustrations of how “shadow flipping” takes place in the Vancouver real estate market.
In short, and that’s easier said than done when you’re talking about such a complex topic, “shadow flipping” occurs when the sale of a property can be assigned to another buyer – not the original buyer, who was named in the Agreement of Purchase & Sale.
And as the Tomlinson story explains, many of the assignees in the Vancouver market place are the very listing agents who are hired by the sellers to handle the listing and sale in the first place.
Now the entire problem, in my opinion, stems from the fact that the Agreement of Purchase & Sale contains an “assignment clause” that makes this perfectly legal.
So while it’s easy to blame the listing agents, it’s also easy to blame the sellers. We simply need shout in their face, “Hey buddy, you signed the contract! Didn’t you know what you were signing?”
But therein lies the problem – who was responsible for explaining to the seller what they were signing?
Well, the listing agent, of course! The same listing agent that wants to become the new owner/assignee in a few days, weeks, or months down the road!
Conflict of interest? Yes, absolutely.
Illegal? Nope. Not even close.
After this story broke in February, I had a dozen calls from every Toronto outlet, all asking the same question: “Does this happen in Toronto?”
The answer, in short, is “no,” but that simply caused an immediate follow-up question: “Could this happen in Toronto?”
The answer, without question, is “yes.”
Sorry, I should say the answer was yes, but that was before this story, and the subsequent provincial legislation change, took place.
One reporter asked me, “How do you think this happened?” and I told him it was very simple, and it started out like every other trend, that becomes accepted practice: one person started it, and everybody else followed.
At some point, a year, five years, or ten years ago, somebody in B.C. had the bright idea to put an “assignment clause” in the Agreement of Purchase & Sale. After that, somebody else did the same, and then somebody after them, and so on, and so on, until it became universally accepted.
But it would seem, from the content of Ms. Tomlinson’s article, that it then went from accepted to expected, and just about every APS written included this clause.
Read the article, if you have time for 4,000 words.
Read it twice, in fact. Then again.
The takeaways are absolutely shocking, and in some ways, appalling.
In the days that followed the story, we heard the rhetoric about “a few bad apples spoiling the whole bunch,” and while statistically that might be true, it seems as though these assignment clauses created a huge underground market for properties – a secondary market, and with an unregulated, lucrative market on the horizon, it seems to reason that human nature is to take advantage.
So from my perspective, I have to ask what is stopping a listing agent from screwing their client before the sign ever goes up on the lawn?
If a listing agent suspects a house is worth $1.5 Million, with the way the contracts are written, and with the secret, underground, unregulated, lucrative secondary market for assignments looming at arm’s reach, could the listing agent tell the seller the house is worth $1.4 Million, and then have a buyer waiting on the other end?
Yes, he or she could.
I really, really, really don’t like arguing this side, since it sickens me to think there are people that would do this, but real estate is no better or worse than any other industry out there, where the “bad apples” seek to take advantage of the unsuspecting.
And it seems from Ms. Tomlinson’s story, which contained many references to actual people, properties, and prices, that this “shadow flipping” wasn’t a few isolated cases, but rather an established pattern among a group of Realtors in the Vancouver area.
I can tell you that I have never, not once, ever, seen that “assignment clause” in an offer here in Toronto, and if I did see it – even before this story broke, I would question it, and ultimately advise my seller to remove it.
I don’t want to conclude with something as simple as “It doesn’t happen here, we’re safe in Toronto, and Vancouver is a mess,” but I do want readers to know that what was written about in Ms. Tomlinson’s article does not take place in Toronto.
And please don’t confuse the shadow flipping via “assignment clauses” with condominium assignments that we have here in Toronto. They are two totally different things.
Now, as for the reaction to Ms. Tomlinson’s epic piece in The Globe & Mail, suffice it to say, it got the public’s attention!
Everybody in Toronto was talking about it – in my office, at my dinner table, over email – it was all the rage for days.
And it had an immediate impact, as Ms. Tomlinson wrote a follow-up story on February 7th, titled, “Vancouver Area Home-Flipping Leads To Inquiry.”
The story died down here in Toronto after a week or so, but not in B.C.!
In fact, it only took a few more weeks before the government finally acted, and the Premier of British Columbia, Christy Clark, called the practice of shadow flipping “greedy” and “shady,” and announced that legislation is on its way to close the “loophole” that allows the practice.
The article: “B.C. Government Moves To End Shadow Flipping.”
Premier Clark noted that the practice would soon become illegal without the “seller’s informed consent.”
But amazingly, she also said that “any profits from a subsequent flip would go back to the seller,” which I find shocking.
We’re entering a very interesting legal grey-area here, and I have no idea how this is going to play out.
One concern I do have, however is that there is a difference between:
a) allowing the practice, with the seller’s informed consent
b) outlawing the practice
I had a buyer come to me once that fired his old agent, and wanted to work with me. After some time and some investigation, we realized that he was “looped into” a ridiculous 18-month “Buyer Representation Agreement” with his old agent.
There is a very small box on the Buyer Representation Agreement form that specifies it must be initialed “for any contracts longer than six months.”
Was that explained to the buyer? Or was it just highlighted to sign?
Same goes for the “Consent To Multiple Representation” that’s detailed in the “Confirmation of Cooperation” that the buyer, seller, buyer’s agent, and seller’s agent all sign.
If the idea here is to allow the practice, with consent, then all agents have to do is trick clients into providing consent.
Informed or not, once it’s signed, it’s tough to argue out of it.
But all that will come out in the wash, eventually, we hope.
I certainly hope that this announcement from the B.C. Premier is not just lip-service in response to a well-publicized scandal, but rather an actual call to action that will be followed up on.
And all this, of course, is as a result of an investigative journalist from the Globe & Mail, who broke a story that was so shocking, so detailed, and so indisputable that it forced those with the powers to enact change, to take action.
Kathy Tomlinson’s February 6th article changed Vancouver real estate forever, and I wonder if she ever realized what an impact it would have.
Make no mistake – there is no benefit to the practice of assigning the Agreement of Purchase & Sale to a listing agent who is supposed to represent the best interest of the seller. I don’t think this is in dispute, whatsoever.
So I applaud Ms. Tomlinson for putting together this incredible piece of journalism, and as a result, improving the B.C. real estate landscape, which many residents feel has been harmed irreparably.
Kyle
at 10:24 am
I don’t see any issue with the Assignment clauses themselves or people making profit for taking a risk. The only potential problem i see is when an Agent (who presumably has more access to information) is trying to buy houses from unsuspecting people off-market (i.e. making an offer at their doorstep). But i would also have to question the mindset of any owner willing to accept such an offer without first trying to figure out what their house is actually worth. I think the Province would be wiser to educate people on Seller Beware, rather than regulating something that serves to only sooth a few sour grapes.
Other than that this whole story actually sounds specious and way over-blown.
Fro Jo
at 10:32 am
https://www.oreablog.com/2013/01/recap-duties-to-clients-and-customers/
Kyle
at 10:52 am
The Agent isn’t acting as the Seller’s or the Buyer’s Agent and doesn’t have any fiduciary duties to them. He’s acting for himself, saying “I want to buy your house from you” not “I want to represent you in a real estate transaction”. And the Seller and Buyer frankly are foolish to think that he would be working in their best interest. They too should be seeking their own representation, but probably end up being victims of their own greed (i.e. not wanting to pay a commission to an Agent directly or indirectly).
Fro Jo
at 4:31 pm
I read your hypothetical too quickly, Kyle. I agree with your assessment.
Franky B
at 3:02 pm
I agree the story is overblown. The main story is more about allowing non-residents or shadow residents to compete with ‘real’ residents on the same houses and its impact (a societal choice, not a legal one) on such residents, i.e., making their housing non-affordable.
With the assignment clause, Kyle said what I have been wondering all along. How is the market so non transparent that someone leaves hundreds of thousands of dollars on the table in a matter of months and doesn’t know about it? I cannot imagine this happening with any consistency in Toronto, even at the top end of the market. Can someone in the Vancouver market explain this? Ultimately if there is no money to be made by assigning, the practice will stop.
I have sometimes heard people in Markham saying their only criteria when picking a selling agent is the agent’s ties with mainland Chinese buyers, even if they don’t particularly know/trust the agent or can’t communicate very well with them (language barrier), because that’s how they believe they can get the best price. Is it a similar phenomenon in Vancouver?
Joel
at 5:01 pm
I was looking at the stats recently and I think Vancouver was up 25% last year. Someone selling a home they bought 15 years ago for $300K for an offer of $2 million may jump on it. They obviously should have their own representation, but perhaps trust the buyer as they said that they are a realtor and I am sure brought some comps to support their value.
With a 120 day closing and a 2 million offer on a $2.2 million house combined with (25%/3 =8.3%) increase in value while they hold the assignment, you can see how someone ‘lost’ $400K in an assignment.
condodweller
at 2:01 am
I see a few issues here. One, the seller complaining their house is sold below market value, two, the eventual buyer over paying, and three the agent making multiple comissions on each buyer.
What I want to know is what happens when the initial buyer can’t find a subsequent buyer who will pay more? Can they back out of the contract at that point? Because if they can, then it’s totally unfair to the seller because the sale falls through as soon as the agent can’t buy another buyer which means the agent is taking on 0 risk. That, I think should be banned.
The sellers should have no complaint since they can ask for comps to determine the true value of their hosue before they sign. If the market moves fast and the agent can sell for a higher price during the closing time that’s questionable but it effects the buyer more if they are over paying.
Although the ethical question is, should the agent be able to profit from the price increase between signing the contract and the final sale.
My biggest problem with this is that agents are allowed to charge commission to each buyer. Also, since typically it’s the seller who pays the commission, how is he/she paying the commission on a higher amount than the selling price? If I sign a contract to sell my house for $2 million which eventually ends up selling for $3 million, I would expect to pay the 5% commission (using Ontario rates) on $2 million vs on $3 million. So how does the technicality work? The government sees the initial contract for the lowest price on which commission is paid which is signed by the seller and the 1st buyer. What contract does the second buyer see and how does he/she not pay landtransfer taxes? I assume the 3rd buyer thinks he is buying from the owner not realizing he is the 3rd buyer buying from the second buyer. This should be a red flag to the buyer, mind you if it’s a foreign buyer he/she may not be aware that a landtrasfer tax must be paid. Or do I have this wrong? I’m not clear on the logistics of the whole process.
Someone was very smart to have been able to structure the deal to receive commission from each subsequent buyer while only presenting a single contract to the government to collect landtransfer tax only once. At the very least this sounds like tax evasion to me. For this to remain hidden from the government, I assume the agent is also only disclosing one commission as income which also sounds like tax evasion to me.
The following quotes demonstrate that people are already doing what I thought of and mentioned in prior post which is if I ever got into the flipping business I would get my RE license to be able to collect or save my side of the commission. As David likes to refer to agents with 1 or two transactions per year, I suggest that they are not actual unsuccessful agents but rather flippers who chose to get their license to save on commissions. I see nothing wrong with that as flippers take on the risks by buying a property and building a new house and holding on to them to wait for appreciation. There is nothing wrong with this in my view as they are speculating and if the market were to turn, they would be caught out and lose.
Finally, as for the buyers over paying for houses, well that’s their own issue. They should be doing their due diligence and I don’t see an issue with that. My problem with this whole situation is with agents collecting multiple commissions without risk, if in fact they can pull out of the deal if they can’t find a buyer. If they can’t pull out, then they are taking on the risk of losing if the market turns. That leaves us with the unethical practice of collecting multiple commissions which is totally despicable considering the already high commissions on a single sale, never mind multiplying it 2 or three times.
“Building permits are instructive because broker-owners often demolish an older house, build a new one and sell it for up to double their purchase price. In an already tight market, analysts said, all of this activity ties up inventory, contributing to unhinged prices, as brokers and investors hold property and trade empty houses.”
This statement is just evidence of a speculator holding off until prices appreciate.
“The Globe also reviewed several MLS ads, where an investment property owned by an agent is listed for sale by themselves or their brokerage firm. Other agent-owned houses are not on the market, but sitting empty – possibly being held until prices go even higher.”
Again this on its own is fair game for speculators.
“The amount of money being made in some deals is astonishing, particularly when buyers purchase, demolish, rebuild and resell.”
jeff316
at 9:52 am
Would there be any benefit to a two-tiered licensing regime that differentiates between self-service (e.g. agents that are flippers) and public service (e.g. general agents availabel to the public)? Probably not.
condodweller
at 11:37 am
If you look at Fro jo’s link agents are supposed to act in the clients’ best interest. If a self-service agent wants to screw himself, I don’t see a problem with that though I fail to see where that would make sense, therefore, there is no need for a two-tiered system unless you mean there should be tighter controls for other agents that self-service agents shouldn’t be burdened with.
condodweller
at 12:27 pm
David, while Kathy Tomlinson is to be commended for uncovering this practice, she falls short on explaining exactly how it works and how the agents are evading detection. She definitely does not go out of her way highlighting the fact that agents are double dipping for their commission which should be outlawed. I’m sure your readership would be interested in you walking us through the process.
I suspect the BC government is going after this, I haven’t read the follow-up article, not primarily to protect the homeowner but rather to protect themselves as they are losing revenue. They are only getting 33% of the revenue in a case with 3 buyers.
My last post went on too long but here are the issues I don’t get:
1. The contract price between the seller and the 1st buyer is for a lower amount than the 3rd buyer is paying.
2. Are the 2nd and 3rd buyers presented with the original contract and sign amendments or do the agents write up a bogus contract? This is important because the original contract would have the initial low sale price which the 2nd and 3rd buyers should see, and this should tip them off and question why they are paying more. If the agents are presenting a 2nd bogus contract to the 2nd/3rd buyer, how do they get the initial sellers signature on it and what does the land transfer office see?
3. If the 3rd buyer ends up on title, which I assume is a given, how does the property transfer happen at the lower sale amount without the initial owner being wise to it?
4. An even bigger question/problem is how are the agents getting this by the lawyers? It seems to me that at least one side’s lawyer has to be complicit in the deal which raises all kinds of ethical issues which might well lead to disbarment.
5. Last but not least, how does the transaction show up in MLS? Is there just one record of the sale between the seller and the 3rd buyer, or does it show up as three sales? If it’s the latter it shouldn’t be hard for any realtor to search MLS for multiple sales on the same property within a short amount of time.
I think Kathy Tomlinson should complete her investigation and dig up the contracts because for this scheme to work, in my view, there has got to be inconsistencies on the contracts and land transfer paperwork. While the contracts are private it shouldn’t be hard to get the sellers and buyers who complain to turn them over.
With so many parties involved I find it amazing this hasn’t come to light sooner. You have the seller, three buyers, four laywers by my count.
Maggie
at 5:50 pm
Very cool. And she did it the old-fashioned way through a newspaper article.