Presale Vancouver: Understanding the practice of flipping pre-sale condo contracts

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With respect to the recent article in the Vancouver Sun regarding pre-sale assignments some clarification is in order.

The media has recently coined the term “shadow flipping,” to describe the practice of assigning pre-sale contracts in BC.

This practice has been going on in BC for over 15 years.

Firstly, there is nothing “shadowy” (or illegal for that matter) about assigning the contract of purchase before the completion date comes up.

In fact in almost every case the assignment sale is listed on the MLS and realtors are involved on both sides. It is advertised and marketed like any other sale (only it’s more complex to close on the legal side).

Pre-sale contracts are permitted under REDMA (the Real Estate Development and Marketing Act).

S.36 of the Law and Equity Act of BC allows all contracts to be assigned (except where a contrary intention appears in the contract or otherwise prohibited by law).

In response to the many stories in the media about “shadow flipping,” last year the BC government of the day (the Liberals) caused the standard BC CBA/REABC contract of purchase and sale in use in the province by virtually every Real Estate Board to include a “no assignment clause” (s.20A).

Ironically, very few contracts between individual buyers and sellers have EVER been assigned to a third party prior to closing!

This is because the closing dates are typically within 30 days of the contract being entered into and thus, the price will not have appreciated much if any in the interim.

Thus, as is often the case, the government wanted to appear to be “doing something” about a perceived problem, but ended up accomplishing nothing.

On the other hand, assignments of pre-sale contracts are quite common.

In the BC real estate marketplace, the values of pre-sale condominiums have appreciated substantially over the past 15 years (with the notable exception of 2007-8, being the era of the melt down of Wall St.)

Due to the long completion dates for pre-sales (1-3 years), the price differential between what the original buyer agreed to pay and what the completed unit will be worth several years down the road can make an assignment a tempting choice for many would be purchasers –even if their intention was to buy for themselves or as an investment.

Why?

Apart from pocketing the price increase, the original buyer (“the Assignor”) avoids paying GST (5%) and Property Transfer Tax ((“PTT”)(2%) (which may also include a 20% Foreign Buyers Tax) as he does not actually buy the property.

The new buyer (“the Assignee”) buys the property from the developer under the original contract (including GST and an increased amount of PTT based upon the new market value), but also pays a “lift” to the Assignor to compensate him or her for the increased value.

The Assignor will have to pay a fee to the developer (usually 2-2.5% of the sale price) to allow the assignment to take place.

The Assignor will have to pay tax on the “lift,” to Canada Revenue Agency be it capital gains tax or income tax, depending on the circumstances.

The problem that the BC government has with this process is that as the assignment is not registered anywhere (at least as of yet), it does its “cut” of the action so to speak. PTT is only payable upon the actual registration of title at the land titles office –so instead of getting PTT twice, it’s only payable once in the case of an assignment.

I wrote to the housing minister before the last budget and suggested that to fix that problem the government could simply amend the regulations under REDMA to prohibit all pre-sale assignments (unless special circumstances could be shown to demonstrate that the buyer could not close such as a divorce,  job loss or illness).  That way any speculator, foreign or local would have to buy the presale strata unit and then resell it, thereby paying full PTT and GST in the process.

Instead of heeding said advice, the BC government is apparently coming up with a new registry to track assignments.

This will solve nothing and will just expand the government bureaucracy yet again! (however that could be the actual purpose, knowing governments)

Like the previous Liberal government, it’s an attempt by NDP to appear to be doing something to address affordability and housing supply, while actually accomplishing little.

DISCLAIMER:  The foregoing is not legal advice, but is presented for information purposes only. Buying or flipping presale strata units is complex and it is suggested that the reader obtain proper legal and other professional advice prior to entering into such agreements.

© 2018 Pazder Law Corporation