May 2, 2018

Condo Presale Shell Game Just About Over in Metro Vancouver

gameFrom the “it was too good to be true” department, investigative reporter Kathy Tomlinson peels the speculative skin off the local Vancouver condo flipping practice in this Globe and Mail story.
Buckle up, as editorials are already coming out about this rocky ride and the completely expected push-back from realtors that have engaged in some property transaction flips and profited very handsomely from it.
By looking at the purchases within six Vancouver-area condominium developments,  Ms. Tomlinson found that in the three finished developments, “at least 32 per cent of 173 condos flipped at or near completion were resold by buyers who were also real estate agents, along with other speculators with inside access who had bought in early…On average, those players each reaped a gross profit of $145,359. Their collective windfall was $10.6-million.” 
And here’s what else is fascinating about all this: “Several additional resales by insiders couldn’t be added up, because they were done through contract assignment, also known as “shadow flipping.” Assignment deals such as that — where an initial buyer sells their contract to another buyer pre-construction — aren’t registered as sales with the land-titles registry.” 
The Globe and Mail’s Gary Mason is using the term “shadow flipping” which was used for the “flipping” at higher costs of sales agreements for single family homes in advance of the registered sale of the house. No established terminology has yet been developed for the “shady” markup and transfer of condo assignments prior to occupancy.
The only person who knows how much money has changed hands in these “shady” flipping practices is the developer…but now Canada Revenue Agency has a concept of how much speculator profit is not being reported as income on taxes.
This is a clear example of why condo prices are escalating, and why the Province of British Columbia now wants to force developers to offer pre-construction condo units to all potential buyers at the same time and at the same price.
Cutting out the speculative flipping should provide more stable real estate prices, and some commentators like journalist Gary Mason are suggesting that a house of cards has been made with the current system and it will not take much for it to come crashing down.
Get ready for all the excuses, and the condescending talk about how we don’t understand how the business really works and how developers need to be able to sell to speculators. Don’t buy it – any of it. It will be self-interested nonsense from people who once filled the financial coffers of the political party previously in power in B.C., likely banking on that government to not change the rules of the game.”
And this just in from the Union of British Columbia Municipalities:

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    1. They aren’t shadow flipping, but they’re definitely useless speculation that is underregulated. Flipping of the assignments should be taxed just like day trading.
      Full marginal tax rate on any and all profits. No capital losses deducted.

    2. Hi Mike,
      For clarification purposes, a few questions:
      1) Are PRECs able to purchase presale condos and assign the contract to their own client?
      2) Are presale buyers able to assign a contract without disclosing the presale to the assignee, ie. the ultimate buyer?
      3) Are presale buyers allowed to mark-up the developer’s price?
      4) If the answer to any of the above is ‘Yes’, is the contract language regarding the assignment in language that is plain enough that an unsophisticated buyer is likely to understand the nature of the assignment and/or price?

      1. Just a clarification that I am not a lawyer nor am I a managing broker, so please both for clarifications on these answers.
        1) Are PRECs able to purchase presale condos and assign the contract to their own client?
        Never done this and never heard of this happening.
        A realtor cannot purchase properties in their PREC’s.
        I am not sure if a Realtor personally can sell to their own client (never done this, so would not know), but I think it would conflict with the agency relationship?
        I personally would not do this.
        2) Are presale buyers able to assign a contract without disclosing the presale to the assignee, ie. the ultimate buyer?
        Not possible. The sellers agent has to disclose any previous assignment.The ultimate buyer (I presume this is the last buyer of an assignment that has changed hands?) would need (or should) to see all of the contract documents of all previous transactions. (Haven’t seen presale condo assignments change hands more than once since the days of Shangri-La)
        3) Are presale buyers allowed to mark-up the developer’s price?
        Not quite sure what this means. Can you clarify?
        4) If the answer to any of the above is ‘Yes’, is the contract language regarding the assignment in language that is plain enough that an unsophisticated buyer is likely to understand the nature of the assignment and/or price?
        In my experience, assignments are only purchased by sophisticated buyers due to their complexity and large cash requirement.
        Most people are not even aware that presale condo assignments exist, let alone understand how they work.
        Unsophisticated buyers tend to be more interested in buying existing properties or presales directly from the developer as they are much simpler and do not involve as much cash or complication.
        The buyer needs to understand the contract language if they are going to buy a presale condo assignment.
        There are standard assignment contracts provided by the Board, but addendums are usually used by Realtors who sell these to protect their clients and vary depending on the Realtor. Most of the the language I have seen on these contracts is clear, but I help clients buy and sell properties for a living so I have a bit more experience with sales contracts than most.
        Most Realtors never come across clients who want to buy or sell presale condo assignments. Many Realtors do not understand these contracts.
        Presale condo assignments are very complicated and I always recommend a buyer get a qualified Realtor who knows presale assignments well to represent them. Its also recommended to speak to an accountant and a lawyer when selling or purchasing presale condo assignments to clearly understand the legal and tax complexities and implications.

    3. You do realize Mr. Stewart that your excuses and prevaricating are exactly what Gary Mason predicted in his opinion piece?
      It’s clear the era when developers and realtors colluded to screw over home buyers is ending.

  1. Another excellent article from the G&M, who have done an amazing job of uncovering the tainted realty industry practices. Not only should these speculators and flippers be paying income taxes and the Property Transfer Tax, flippers and speculators should pay a much higher rate to discourage this and similar practices.

    1. Why should it be discouraged ? It should, of course, be taxed. It’s a (risky) business transaction with unknown outcome 2-4 years out !
      Also, since no property is transferred, merely the right to a future condo, land transfer taxes clearly do NOT apply.

  2. Yes we will see SOMEWHAT less flipping as taxes finally get enforced. However, it’s a risky businesses and risk has to be rewarded, i.e. a 3-4 year commitment of money tied up with unknown outcome ! Also, developers rely on it to get construction financing. A developer’s view on this here
    Supply will drop hard in 2019 and 2020 as a reaction to these many new taxes and enhanced enforcement. Do NOT expect prices to move much !
    Demand begets supply, not the other way around !

  3. My admiration for Kathy Tomlinson and her investigative skills has only increased. She has nailed several controversial issues to the wall on Vancouver real estate without resorting to blanket generalizations and innuendo about foreign buyers and zoning,, unlike one of her colleagues.
    Tomlinson came from the CBC initially and became engulfed in a controversy with The National’s then chief financial reporter, Amanda Lang, who defended the Royal Bank’s use of temporary foreign workers when Tomlinson exposed this practice in a CBC investigative piece. It turns out that Lang was dating an RBC board member, and actively tried to quash the story. Neither lang or obviously Tomlinson work for the CBC any more. I am very happy that Tomlinson landed on her feet at the Globe and continues her exemplary investigative journalism.
    A fascinating read:

  4. It’s interesting that single family homes in Vancouver peaked and then corrected, the amount being of course dependent on price and neighborhood. During the time that SFH prices have stalled, condo and townhouse prices have skyrocketed. At the SFH peak, there were large older condos available for seven to eight hundred per square foot. Today there is very little inventory under 1000 per square foot. And recent land sale prices in the Cambie corridor suggest that new builds will have to be priced at 1300 to 1500 per square foot.
    Condos and townhouses at 1200 square feet are reaching the price of teardown houses on the east side. This is unprecedented.

    1. And why would it stop there with 40-50,00 people moving to Vancouver area annually? Taxes and flipping restrictions won’t do much. Just more money for wealth redistribution
      It’s not really about housing. Vancouver area will become less affordable to buy, although we will get eventually more rentals forced onto new developments and with more public money.

  5. People who by & re-sell is nothing new. It arose widely in the mediaeval period and continues. In fact there are numerous people in all Craigslist cities who derive a living from low-balling an advert, with no interest in the item except to re-list at a higher price than they paid. (Yes, you’ve rec’d one of those offers). When it succeeds, the original seller gets their cash flow, and transfers the sales risk to the speculative buyer.
    In realty, this works in a rising market, but during downmarkets (or sharp corrections, as in 2008-09), it is deadly costly, and can quickly wipe out previous gains.
    The further and further financing gets earlier into a project, such as a pre-sale, it becomes less of a ‘sale’ and more of a project lending, which reduces the considerable financing costs (and risks) of home building. In the accounts of banks & builders, a pre-sale functions less as a retail transaction more like a small, high-interest, short-term mortgage.

    1. Absolutely it is.
      Refreshing to see that some journalists in this country have a grasp of how markets work…
      Deleted as per editorial policy. Please read policy.

    2. My first reaction was, Oh my, that’s the Terence Corcoran who lost a $50,000 defamation suit filed by Andrew Weaver based on egregiously erroneous and personal comments on global warming made in a National Post piece when Weaver was in his role as a respected UVic climate scientist. A reluctant retraction was eventually published.
      In one respect Corcoran is right about constraints on housing supply through regulation, and by that I don’t mean filling in English Bay or carving up the ALR for more sprawl, things that his libertarian sensibilities might just agree with. But from a non-ideological, neutral land planning perspective, the vast acreage in residential land IS being constrained in RS zones everywhere. By extension, so are the alternative Missing Middle housing types and more diverse, gently densifying walkable neighbourhoods.
      That must change for future generations. But please leave the ideology at the curb.

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