The owner of a Richmond real estate company says he’s officially banned a practice that has come to be known as “shadow flipping” and is encouraging others in the industry to do the same.
“This really isn’t a brand-new phenomenon,” said Kevin Lynch, CEO of Metro Edge Realty. “I remember when I first started I was over on the North Shore and all the West Van guys, the marketplace was blowing up and all the West Van guys were locking up property and flipping them.
“I always felt that’s not right. You’re taking the lift off these sellers where your licence dictates you should be representing them, not taking from them.”
A February investigation by the Globe and Mail showed some Vancouver realtors are using a mechanism called an assignment contract to flip residential properties several times before the deals close. Realtors interviewed for the story said the practice results in a price increase with each flip, with sellers often being unaware of the speculative nature of the deal.
Following a public outcry, the provincial government tasked the Real Estate Council of BC, a disciplinary body, with investigating the practice. An advisory panel was struck on February 22 and will report their findings in late May.
According to a guide on the Real Estate Board of Greater Vancouver’s website, the original seller should know about the assignment deal.
Metro Edge's policy states that the company's realtors cannot assist with or be part of any assignments the company has listed or sold. Lynch said he particularly wants to avoid the situation where two realtors working for the same real estate agency might be representing a seller and a buyer, respectively, in a deal where assignment contracts are being flipped and inflating the value of the property.
“For me the best way to ensure that we hold ourselves to a higher standard and hold our agents to a higher standard is being really clear about the fact that we have no tolerance for internal shadow flipping,” he said.
While Lynch has worked in real estate for 26 years, Metro Edge is a new company and Lynch has ambitious plans to expand to seven offices around Metro Vancouver in 2016. He said he put the “no shadow flipping” policy in last week and has held training sessions for his realtors.
In addition to Lynch’s memories of the West Vancouver market, the practice of flipping assignment contracts was also common in the pre-sales condo boom in the heady years before 2008.
Lynch said the practice is more common in commercial real estate, an area of the market with much savvier deal-makers than residential home owners. He believes shadow flipping in the residential market is being spurred by the extremely hot market that has emerged on the residential side over the past year. Detached home prices on Vancouver's west side rose 22% while east side detached home prices rose 31% over the course of 2015.
Read: Vancouver housing has never been more unaffordable: RBC
“I’ve seen probably two or three similarly hot markets, but not so hot [as this one],” he said.
While this is certainly not the first “surge” of money to come into the Vancouver real estate market from China and Hong Kong, Lynch said, offshore money is currently coming into the market at “a higher lever than I’ve seen before.”
Read: Vancouver real estate: is it supply and demand, or foreign capital?
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