Protect Yourself from “Shadow Flipping”

I conduct regular seminars titled “Selling Your North Shore Home” at the West Vancouver library and one of the topics that generates considerable discussion is unethical real estate practices. Thanks to the Globe and Mail’s excellent recent article on what they term “Shadow Flipping”, this Grand Daddy of legal fraud is now receiving the national exposure it deserves.

Shadow flipping is a form of property assignment that allows the purchaser of a home to sell the Contract of Purchase and Sale to another buyer prior to completing on the purchase. For example, if buyer A purchased a property for $2 million and, through his agent, was able to find another buyer (B) to pay $2.5 million prior to completion, he would simply sell the contract to buyer B and walk away with a $500,000 (less commissions) profit without ever completing on the original purchase. There are many instances where a contract is assigned (flipped) several times before completion. The original seller may have sold the property for $2 million but by the time the dust settles and the final purchaser completes on the property, including paying the property transfer tax, the contract may have been sold for $3 million or more. Understandably, the original seller feels exploited and the final naive buyer often over pays for the property.

This assignment clause is legal and was originally established to protect the seller if a buyer ran into financial difficulties prior to completing on the purchase. It offered the buyer the opportunity to sell the contract to another purchaser allowing the new buyer to close on the transaction. Unfortunately, as the Globe & Mail article explains, there are a few unethical agents who now use this clause for personal gain. These agents fail to disclose the fact that they (or direct family members) are the actual original purchasers of the unsuspecting seller’s property. This is an illegal practice subject to fines and/or license suspension. Whenever a real estate agent is personally involved in an MLS transaction he or she must disclose this fact to the other party. When an agent fails to disclose and is, in fact, the clandestine purchaser of his client’s property, he is the one that profits from the ensuing shadow flip – most unethical.

The two clauses I suggest a seller use if they are concerned about contract assignment are either:

  • “The Buyer agrees not to assign this contract in whole or in part to any third party unless the greater of $_____or___% of the difference between the Purchase Price and the Assignee’s Total Purchase Price is paid to the Seller at completion.”
  • “The Buyer agrees not to assign this contract in whole or in part to any third party without prior written permission from the Seller.”

The vast majority of agents never consider participating in this behavior but it seems clear from every report I’ve read that a small group of unethical agents are responsible for this immoral practice. I’ve had direct experience with several of these agents in both West and North Vancouver and at least one of them is being sued by a client for this very activity. Much of this behavior seems to be cultural in nature and likely won’t stop without much stronger regulation.

During my seminars I always warn participants never to accept an offer from any individual who knocks on their door and offers them cash for the property. If you intend to sell, it’s always good practice to hire a credible agent and have him/her list it on the MLS. A listed property will be much less prone to contract flipping while attracting qualified buyers and guaranteeing fair market value for your property.