Client confidentiality might trump a realtor’s disclosure of a home being flipped under an assignment sale, a topic that has drawn the attention of B.C.’s premier, the Real Estate Council of BC (RECBC) and Canada Revenue Agency (CRA) investigators.
Some Vancouver-area real estate agents and investors are making windfall profits through assignment sales, a legal method that allows a home to be resold before the original sales agreement closes.
The practice was widespread in Vancouver a decade ago. It preceded the 2008 crash in the pre-sale condominium market. Today the focus has shifted and the profits have risen in the city’s white-hot detached-housing sector. The CRA, which is studying approximately 128 transactions, suspects that some income is not being reported by either real estate agents or investors.
An investor flipping a transaction is supposed to report the profit as business income. For example, if the investor sold an assignment for a $500,000 profit, it would be subject to a 47.7% tax (based on B.C.’s top marginal rate), or $238,500.
However, if the house is a principal residence, there is no tax on the sale, and because assignments are not registered on land titles, tax avoidance is tempting. Real estate agents also collect commissions on assignment sales.
A Business in Vancouver investigation has found that close to 20% of Vancouver detached sales since 2014 can be defined as flips, where a house is bought and sold in less than 12 months. In the Dunbar area on Vancouver’s west side, for example, BIV and Landcor Data found 30 houses that were bought and sold within months during 2014 and 2015.
The typical Dunbar-area house flip generated a 23% return, or an average of $1,360 per day that the house was held, according to Landcor Data.
Real estate regulators are concerned that some realtors might be acting as both agents and investors without advising their clients, a contravention of RECBC regulations.
The watchdog RECBC, which enforces the licensing and conduct of B.C. real estate agents, is appointing an independent advisory group to investigate whether assignments are being used inappropriately.
Premier Christy Clark said the province would act if RECBC did not find a solution.
But realtors note that real estate agents also have fiduciary duty to their clients not to release details of sales agreements. For example, if a realtor’s client is buying a property to flip it, no disclosure has to be made to the original seller, said veteran Vancouver realtor and senior property adviser Neil Hamilton of Macdonald Realty. “In fact, the realtor has a duty of confidentiality not to disclose his client’s intentions. Similarly, a separate realtor representing the buyer has no responsibility to disclose to the listing realtor what his or her client is doing and in fact isn’t supposed to.”
However, a realtor who is actively part of the transaction must disclose that fact.
“He/she may not have to say that they’re flipping it, but they at least have to disclose that they are an active part of the sale in some way,” Hamilton said, “and a smart seller can draw their own conclusions.”
Vancouver real estate lawyer Wesley McMillan of Hakemi & Ridgedale LLP noted that there are risks involved in flipping assignments if the housing market suddenly cools.
“Assignments come with significant risks for all of the parties involved, particularly assignors,” McMillan said. “Unless the assignment agreement states the assignor is free from future liability – and the vendor agrees to it – the assignor remains exposed. If the assignee does not complete the purchase, the assignor can be sued for the damages suffered by the vendor. In a declining market, these damages can be significant.” •
