Time to shine the light on shadow flipping

By Jim Quail

A recent Globe & Mail investigative report revealed that some BC realtors may be driving up house prices by speculating on properties in whose listings they are engaged, or “shadow flipping”.

In shadow flipping, a chain of transactions is lined up in which one property is bought and sold for increasingly higher amounts over a period of several months. The very first sale is set up to have a long closing period, and the rest of the transactions take place during that period. Ownership never actually transfers to those intermediate investors, but the realtor may make s a commission and the investors may make a profit each step of the way. The original seller receives the initial sale price, the end buyer pays a much higher price, and the realtor and investors may pocket the difference and avoid paying property transfer tax.

The provincial government has left it to the Real Estate Council of British Columbia to investigate, but early indications from that organization are not encouraging.  Under increasing public pressure, the Premier has suggested that the province will intervene if the Council does not do a satisfactory job.

That is not good enough.

It is bad enough that speculators are treating our housing stock like a casino. Now with some unscrupulous realtors potentially diving into the trough, playing with the homes of customers who rely on their expertise, honesty and judgment, things are truly out of hand.

If a realtor intervenes and shadow flips a home between its sale by the original owner and its acquisition by the eventual purchaser, both the seller and buyer have suffered: the seller because they did not receive the ultimate price the realtor obtained for the home on the market, and the purchaser because the realtor’s intervention drove up the cost of the property. The realtor and other “shadow” participants have profited at the expense of both parties.

The role of a realtor in these scenarios is essentially parasitic: it adds no value to anything other than the  bank accounts of the shadow players.  Furthermore, in a shadow flipping scenario, the realtor may be relying on “insider information” about listings and market interest in properties for their personal profit.

All this is aside from allegations that some realtors indulging in this shadowy activity may be structuring the transactions to avoid paying millions of dollars of taxes to the provincial government. The inaction of the government in this situation is puzzling.

Because their roles are founded upon public trust and reliance, it is vital that realtors be prohibited from allowing their personal interests or secret dealings to compromise their obligations to the public. Speculation by the real estate industry in customers’ properties should be restricted to the point of virtual prohibition, in any transactions affecting properties where they or their agencies are involved in any aspect of the listing. The prohibition should extend to private interests of family members or corporations in which they have a stake.

Realtors should leave gambling to the gamblers.

At a minimum it should be mandatory for realtors disclose in writing all assignments of real estate sales transactions, as well as any personal interest, including that of relatives or of related corporations, or the interest of any real estate agency with which they are affiliated, in any aspect of the sales transactions, to all sellers and purchasers.

Violations should result in severe penalties, including lengthy or permanent license suspensions and confiscation of all secret profits, which should be distributed to the affected parties.  If the Real Estate Council will not provide tough oversight, it should be reformed or replaced.

Lawyers operate under close scrutiny by the Law Society to ensure that they do not permit their personal interests to conflict with those of their clients. They must treat clients with transparency and professional integrity. Conflicts of interest with clients result in penalties up to and including disbarment. If a lawyer hired in a property transaction indulged in any of the activity reportedly engaged in by some Greater Vancouver realtors, they would be thrown out of the profession and justly so.

The same should apply with equal force to the real estate industry.

It’s time for the government to intervene and lay down the law.