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Shadow Flipping Properties in Vancouver
The truth behind assignments in property transactions, why the BC Government's proposed course of action is not an effective answer, and how you can protect yourself when you sell your home.
It has been suggested that it is the greed of Realtors that is driving this Shadow - flipping phenomena. The Sellers who are assigning the contracts are the ones who profit the most from this practice. Additionally, if there weren't Buyers who were willing to pay, these assignments would not be happening. It seems as though the Government of BC is concerned that there are individuals profiting from assignments and they aren't getting their tax money. The Property Transfer Tax, which is a quick cash grab by the BC government when a property changes hands, is completely bypassed in assignments. However, the Property Transfer Tax is charged when title is registered in the new owner's name and if the property is assigned then it does not need to be registered, therefore, there should be no transfer tax fee.
According to an article in the Vancouver Sun on February 14, 2016 "Vancouver accounted for nearly one-quarter of the government's $1.15-billion windfall from B.C.'s property transfer tax in the past fiscal year". http://www.vancouversun.com/
The Property Transfer Tax was originally introduced in 1987 and is deposited into general revenue, not dedicated to housing as would be expected. The tax is 1% of the first $200,000 and 2% of the balance and a significant form of tax revenue for the government as well as a substantial burden on home buyers when they purchase. Recently a few changes have been made to this tax that take effect April 1, 2016: New homes worth up to $750,000 are exempt from B.C.'s property transfer tax under changes in Finance Minister Mike de Jong is raising the exemption level from $475,000 on new homes and expects to make up most of the revenue by increasing the tax rate from two to three per cent on the value of homes in excess of $2 million. In a city with housing prices as high as Vancouver, there aren't a lot of new construction properties under the $750,000 value. The government expects to collect about $200 million more than it budgeted for in 2016 due to rising home prices and number of sales.
The Vancouver market is climbing at an astounding rate for a number of reasons. Global economic factors, offshore investors, low interest rates, the fact that Vancouver is a very desirable place to live, with low crime rates and superior education systems to name a few. It is a perfect storm. As long as there are purchasers willing to pay, it will continue. Ultimately, it is the purchasers who are driving the prices up. If people stop buying, the prices will drop. Yes, Realtors in Vancouver are making money due to this but for any Realtor who has been in the business for some time, they know that the market can change almost overnight. As with any self-employed person, Realtors do not have a guaranteed salary. The Sellers are the ones making the most money and the Government of BC the second most with their collection of Property Transfer Tax.
Assignments exist in many different types of businesses, not just Real Estate. It seems Realtors are under scrutiny for making money at their chosen profession. Certainly there are situations when the professional makes money in an unethical manner but just because they have been involved in an assignment does not mean that is the case. Realtors are required to disclose any renumeration received in regards to property transactions. This includes the purchase and sale of their own homes. In most types of business, the professional is not required to have the client acknowledge in writing that there will be compensation for services rendered.
Many Sellers are taking advantage of the quickly rising Vancouver prices and asking for terms such as free or payable rent backs for several months or even years as they aren't yet ready to downsize. Another alternative is to ask for a completion that is much longer than what would be considered the industry standard. If Bob & Mary sell their house in January of 2016 in an affluent area of Vancouver because they are having a tough time meeting their monthly expenses and the Buyers do not complete on the deal until December 2016, it is entirely possible that the market will have increased substantially in that time.
Let's suppose the Buyers of their property, Gord and Sheila may have a change in their life circumstances in that period and then assign the contract to a third party for $700,000 more than the original contract. Under changes proposed by Christy Clark, the $700,000 increase would be payable to the original Sellers, Bob & Mary. The first buyers of the property took a risk in purchasing a property and giving the sellers a long completion which they had requested. They took a risk assigning the contract in that the assignee may not complete, in which cases the first buyers would still be responsible, and the Sellers took the risk the property could go up substantially in value between the time the contract was written and they received payment. The Realtor will be paid for his/her work in the transaction and is expected disclose receiving payment for services rendered. Is the BC Government going to offer the original Sellers financial assistance if the assigned property decreases in value?
Another example of this is pre-sales in developments that are not to be built for 2-3 years. Purchasers of these projects are taking a huge risk as the market could change dramatically either way before they take possession. Many developers have rules regarding assignments, typically requiring a certain % of the increase in value should the contract be assigned and there is a profit. However, they don't offer a payback should the contract be assigned and the market decreases. Under Christy Clark's proposal, the developer would receive the entire profit, which would beg the question as to why Buyers would consider purchasing a pre-sale when all the reward is removed with the same risk.
The current situation needs to be addressed at face value. Those Realtors who are acting in an unethical manner, not adhering to the rules of disclosure of renumeration, or intentionally deceiving clients for profit should be penalized. However, those who are acting in the best interest of their clients, with transparacny and disclosure, are just doing their job well and earning an income just like everybody else.