Shadow Flipping

Going through the headlines this morning, I came across a heading that reads “Shadow Flipping not limited to Vancouver market” and an article in the Globe and Mail that reads “BC’s house flipping practices setting off alarm bells in Ontario“. The article highlights a pro-active move on part of Real Estate Council of Ontario (RECO) which says “.. it (RECO) doesn’t believe the practice of assignment flipping is widespread in Ontario”.

There are anecdotes in the past of the assignment clause having been abused in new condo builds by some investors in Toronto and that the CRA had cracked down on many such speculators effectively putting an end to the practise. Also contributing was the fact that builders increased prices to diminish the attractiveness of such assignments. Typically builders would not allow assignments until they have sold all the units.

It is difficult to believe that what happened in Vancouver may not be happening in Ontario, albeit, at a smaller rate given the fact that there is (for the lack of a better term) cross pollination in the industry. If it did, it would probably be on pockets of very high end properties. We have to wait to see how this unfolds.

Another pro-active act on part of RECO is that they are considering sending a strong reminder to its members about their fiduciary duties to the client and exhorting them to avoid misusing the assignment clause.

It is important to set up a system to collect information on assignments so that it can be assessed on a periodic basis and shared with the CRA in order to prevent revenue leakage. Also, this will effectively prevent any abuse of the assignment clause and will be more powerful than just a warning.

Would it not be a good idea to make it mandatory to get the seller’s consent in writing while making assignments? I cannot imagine any seller not wanting a piece of incremental profits if they get to see the bump in the sales price while reviewing the assignment. This will effectively reduce the attractiveness of abusing the assignment clause while enabling its use in genuine cases where buyers are in actual distress.

 

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