“Shadow flipping” is the new term thrown around quiet a bit in the last two weeks. Turn on the news or go online and all you see are evil realtors taking advantage of the public, earning 10 commission on each sale and directly causing global warming.
Let’s make sense of all of this.
What is “shadow flipping”?
It’s a controversial “sales technique” used to sell the assignment of the Contract of Purchase and Sale before the completion date. Real estate agent would collect real estate commission for each assignment of the contract.
For example:
Buyer#1 “buys” a house for $2 million. Before the sale completes (all money is paid) the contract is sold to the buyer#2 for $2.3 million. The buyer#1 who sold the contract makes $300,000 (minus the real estate commissions). The original seller is left with $2 million (minus the real estate commission and expenses). And the real estate agent collects real estate commission 2 times; once for the sale of the property to the buyer#1 and once for the sale of the contact to the buyer#2.
Most news articles use similar examples, but in their examples the contract is sold (assigned) twice and the real estate agent collects 3 real estate commissions. In my opinion these examples are ridiculous. Hypothetically speaking it is possible to assign (sell) the contract unlimited number of times but selling (assigning) the same contract twice is very very rare. These examples are used to scare the public and reinforce the message, but only make things more confusing. Nevertheless, shadow flipping is wrong and scary without ridiculous examples.
Some real estate agents and savvy investors found a way to abuse the “assignment clause” in the Contract of Purchase and Sale. In some cases the original seller doesn’t get a full value for their property. In some cases the buyer of an assignment overpays for the property. Most of the time someone in the transaction is taken advantage of. As real estate agents we have a fiduciary duty to work in our clients best interest, however we still have to follow the code of ethics. We can not put our own interest before the interest of parties involved in the transaction and the general public.
“Shadow flipping” is not a new concept. In fact a lot of “get rich quick from real estate” schemes depend on this strategy. You’ve seen the infomercials. It has been around for a long time. “Shadow flipping” is not limited to British Columbia either. Most of Canada and the US have the “assignment clause” in their Contacts of Purchase and Sale. It’s actually a beneficial clause if used right.
It is very sad to see some of my real estate colleagues participate in such shady schemes. It shines a negative light on the industry as a whole. It is not fair that a few dishonest realtors bring negative publicity to everyone. These cases should definitely be investigated. These responsible need to be brought to justice.
Real estate industry as a whole does not support unethical behaviour of a few.