The Real Estate Flip

The “flip” is a scheme which real estate agents must be aware of and avoid. This manoeuvre has been a source of great concern to the ACAIQ in recent years. It consists in the quick and successive sale of the same property with a substantial and unjustified price hike. Both transactions often take place the same day, a few minutes apart.

The instigators of the flip, often part of a structured organization, first simulate an interest for a property by presenting a promise to purchase to the seller. However, they have no intention of buying the property for themselves. At the same time, a second promise to purchase at a much higher price is drafted between the “flipper” and a buyer. This buyer’s financing is often secured by the organization and the file usually includes false documents attesting to the buyer’s financial situation. With a notary’s participation, the organization first closes the sale with this buyer. Then, with the money from this sale in hand, the final details of the initial promise to purchase presented to the seller are settled and the transaction is concluded. Thus within a few minutes the organization makes a profit, corresponding to the difference between the two transactions.

This scheme contravenes several of the rules of ethics that govern real estate agents, including those related to integrity, fair treatment of the parties to a transaction, and acting with objectivity in the course of a transaction. The Discipline Committee takes very serious view of real estate agents who participate in such transactions, which have disastrous consequences. Among other problems, they can cause a major prejudice to several parties, namely:

damage to the buyer’s credit and financial reputation or even bankruptcy due to having paid too much for the property compared to their means and the market; losses for financial institutions that are conned into lending against an immovable that is worth less than the guaranteed loan; undue upward pressure on real estate prices created by the artificially inflated prices of flipped properties; selling price of the flipped property too low in the first of the two successive sales, causing a financial loss to the first seller.

A buyer contacts an organization offering financing solutions that are attractive to him; Detailed description sheets of properties, selected because they lend themselves well to a flip, are submitted to the buyer; When a buyer is interested in a property, a collaborating real estate agent, in cahoots with the organization, takes the buyer to see the property without explaining the successive selling scheme that the organization intends to do; If the buyer is interested in buying the property, the real estate agent prepares a promise to purchase on behalf of the organization with which he is in league, and the organization buys the property through a numbered company or a nominee holder. Another promise is drafted simultaneously between the buyer and the organization at a price that is much higher than what the organization is offered to the seller; The initial seller and the second buyer often don’t know the identity of the other party; The notarized acts are signed on the same day, so that the organization receives in payment the financing obtained by the subsequent buyer; The organization thus finances the first sale using the loan obtained by the subsequent buyer.

In coming years, this scheme, now common, could be altered by the organizations involved in them and become more sophisticated. However, regardless of variations in the mechanism, the result will remain more or less the same and will still be recognizable as long as agents keep in mind the main characteristics of a flip, with is the rapid and almost simultaneous purchase and resale, with the pocketing of a profit unbeknownst to a buyer and to the detriment of a financial institution.

When a real estate broker or agent takes part in such transactions, our profession’s credibility with financial institutions and the public suffers. Such involvement is considered a serious offence that can lead to a suspension of the broker or agent’s certificate for several months, sometimes even years.

Real estate brokers and agents should have no part in these transactions. When faced with a situation that looks like what is described above, open your eyes and don’t hesitate to denounce it as an illegal practice.

source: ACAIQ