From the perspective written in the article, I don't understand why the seller is portrayed as upset: they did the deal at a price they agreed upon. Just because another buyer came in "after" that had a better price changes nothing; this could happen in a non-assigned transaction too. This part, at least, is a natural part of the mechanism of price finding in the market.
It is an interesting question why the sellers are mispricing their homes by as much as 30%, but if you know anything about the Vancouver real estate market, it is perhaps not that surprising: numbers move very fast, a lot of inexperienced non-investors own property (that they have usually owned for a very long time) and have perhaps never been involved in a deal of such scale.
If I were the buyer in the first transaction, however, I'd be very upset with my real estate agent though: his job was to advise me, not to be my adversary in an internal negotiation. He did not act in my interest, despite representing himself as my agent. I would be promptly reviewing my real estate contract and the real estate laws in my province for words like "fiduciary duty" and given the size of the transaction, probably consulting a lawyer.
A stark reminder that real estate agents are not your friend -- and actually, that is true regardless of what side of the transaction you are on. They are almost always paid by the selling party and still even have non-aligned incentives even for that party: preferring to get a sale done quickly than to get a better price for their client (as they only earn a fraction of the increase, but there is a high fixed 'minimum' property price in any given jurisdiction; a second sale will do much better for them than a 5% increase in their current sale).
> Just because another buyer came in "after" that had a better price changes nothing;
If the broker landed what was truly the highest price at the time, then you're right. However, the implication is that the broker managed to get the deal done (ie, misrepresented the market-value) and then collected money in a side transaction when the second transaction completed. That's pretty dirty, if it's the case.
The article (intentionally?) confuses seller's agent and buyer's agent. The seller's agent gets the best deal they can get for the original seller. After that the seller's agent is pretty much in the dark for the rest of the process, the way I understand it.
The buyer's agent, taking advantage of the assignment clause and delayed close, can now shop the property (probably without possibility of showings) and if somehow they can find a better offer, pass along to their buyer the chance to flip it for some quick cash.
I don't see anything remotely illegal, unethical, or even unfair.
> After that the seller's agent is pretty much in the dark for the rest of the process, the way I understand it.
It is possible that a seller's agent could fail to recognize a huge mispricing of the accepted offer, and if that is the case you are absolutely right.
However: The seller's agent failed to recognize a huge mispricing?! And lost all of those commission dollars (3-6% depending)? Totally suspicious. At best the broker is incompetent, at worst, corrupt.
BTW: During the previous housing bubble, several folks worried about "pocket listing', which could be a technique for pulling this off: https://en.wikipedia.org/wiki/Pocket_listing
Presumably the seller's agent, who is profiting from this phenomenon, is the one advising the sellers on the market, what is a good price, what is an acceptable offer, etc.. You can't expect the average seller to have their pulse on the market in the same way agents do. It appears that there is a good chance that the selling agent knows that the house could be sold for more, while at the same time advising his clients that it is an acceptable offer.
While the decision is ultimately up to the seller, I believe the agent is obliged to act transparently and in the best interest of their client and whether that is happening here is not clear.
The sellers are upset because they misunderstood the market, by millions of dollars. Whether the world is supposed to be fair or not, it's at least easy to understand why that would be frustrating.
The sellers hired the agent to understand the market. If the seller's agent tells them 'you can sell at this price' but buys the house themselves, and resells it at a profit, they clearly misled their customer about the optimal price that they could get for the house, for their own benefit. They're in a conflict of interest.
This is not the first time I hear of real estate agents buying houses from their customers and profiting from them. If my agent tried to pull that on me, I'd fire them, or if it was too costly to do so, I'd raise the price until they're not willing to buy. Then I know I would have reached a price closer to the real market price.
Is that what's happening? How I read it, the sale was being re-assigned to the buyer's agent. It definitely means the seller's agent left some money on the table for their clients, but not necessarily that they did so on purpose. I guess that's why this exists... the seller's agent can point to incompetence (unintentionally mis-pricing the home) rather than foul play.
Perhaps we're talking about different cases. I'm not seeing any home in the article that's priced at $1M. I was talking about the first case where the seller ends up selling to the buying agent (not their agent) who then marks it up to the real market value. The seller's agent didn't officially have any perverse financial incentives from that sale, other than the oft-cited incentive to price low and sell quick that all brokers have [0].
I re-read the article and I misread it, I thought they were selling to their own selling agent. I guess they instead sold it to the buying agent. If that's the case, then I guess there's nothing wrong since the selling agent is the one that is guiding the sellers, although it sort of makes one wonder if there was collusion going on.
Yeah, I think the most troubling piece of this is how hard it is to figure out if something illegal was going on. I'd say it's definitely a point in favor of just listing your home on the open market rather than doing a pocket listing (a private sale without listing). Even if you really trust your agent, pricing a home is really hard and is best left to competing buyers. It sounds like a lot of these sales were "listed" by realtors who already had an offer in hand when they contacted the owner so they weren't really soliciting the open market for highest and best offers (which is definitely a violation of their fiduciary duties).
Yeah the point in the article about eroding trust in the broker market is important. Lots of people are (legally) taking advantage of a hot market to make short-term profits, but may be creating a long-term impact on the reputation of an entire industry.
Maybe this is an opportunity for property appraisal companies to step in and make a B2C play..
That would certainly be interesting but after working in real estate for a bit now, I've yet to see an appraisal company that was able to figure out the current market value with any precision. In general appraisals are looking at the intrinsic long term value (i.e. will the bank be able to sell this if the buyer defaults on the loan?), not the current market value which is more about market dynamics. That isn't to say it's impossible... I know that Redfin has done pretty well with their Estimates tool, but I'd guess that their model (like other models I've seen) relies heavily on list price as an input -- which in this case seems to be completely rigged by the participating brokers.
Even if someone came up with an automated valuation model that predicted potential sale price with a high degree of accuracy, you really shouldn't trust it unless it was completely interpretable or open source. As seen here, there's a great deal of money to be had in misquoting that price. Even messier, these sellers would want a model that could predict sale price today as well as in 3 months (when the home is foreseeably being re-assigned).
If anyone has a model like this, I'd like to talk.
I imagine the 1st (and 2nd in the example) buyer was asked by the agent "you'll get 300k for nothing" and he or she agreed, otherwise like you say it looks "illegal" like you said.
The buyer doesn't have any payment terms with the agents. The agents are paid by the seller. This may normally be with the buyer's money, but that's irrelevant.
Vancouver sw eng here. I've lived in this city for 14yrs, bought in 7yrs ago. My house has doubled in value since then. The min buy in has now reached the 1million mark and continues to climb. The ratio of real estate to salary is out of wack and the talent is starting to leave. Vancouver is becoming a playground for the wealthy.
Another Vancouver sw eng here. Only got here 3 years ago. Have to rent, impossible to buy unless I move outside the core. Then why bother living here if I have to live in Surrey? Unhappy with the fact I have to raise my first kid in a 500sqft apartment. Not sure what I'm going to do if I have another. Hoping the market crashes so I can keep living here...
Come to Toronto. The tech salaries are higher and the real estate market is not amazing but definitely lower, and we have better options for living outside the core without feeling like you're in the burbs.
You lose the ocean and the mountains though, and that can be a really hard sell (source: I moved here 5 years ago from Vancouver).
Just a note. Properties almost everywhere have almost doubled entirely due to interest rate declines over the last 8 or 9 years.
Say a house rents for $25,000/year. At 2007's rate of 4.76% on the 10yr T-bill plus ~200 points for the risk premium, the value of the house is $369,000 based solely on the NOI.
At 2016's rate of 1.85% + 200pts, the value of the house is $649,000, and that's with the same rent as 2007, not even adjusted for inflation.
That's a 75% gain on interest rates alone. Add in other factors such as increased economic activity and capital flight from overseas and you arrive at doubling.
They are being paid $300k in return for passing on the opportunity to buy a property at a below-market price. If they are still aiming to buy in the same market, this could be a bad decision -- if the market keeps going up, they might have to pay even more.
Well, one of the sub-themes of the article was that Chinese investors are underpinning this situation. So you've got a lot of players in the market with no interest in actually living in the city.
I think the effect you mention is probably a lot more relevant to the people selling at below market to speculators that approached them, because if they were assuming that they could finance a home purchase in the city with the proceeds of the sale, they're going to find their purchasing power significantly weaker than they were probably expecting (given that they just clear 3x their original investment, "YAY!"). On top of that, with many agents speculating themselves, and a lot of foreign investors on the buy side of the market, they're likely to find that they are now swimming with sharks having just sold their boat.
Additional commentary: If you find yourself in this situation, you might as well try to get a loan to buy a new house before you sell your current shelter from the elements. If you're no longer able to get a loan for an amount that would get you a house in your area, perhaps that's an indication that you should be very careful with how you proceed. It still may be worth selling, even taking a below market offer (conceivably). But now you know that selling your house is going to mean moving to a more buyer friendly market in advance of committing yourself. Or... if you're the gambling type, renting in anticipation of a bubble burst (though I think heavy foreign investment messes with people's expectations of what is too hot for a given market; certainly it is fickle, but can potentially prop prices up significantly above historical levels for a long time).
I imagine they would provide the capital to finance the deal, otherwise there is nothing stopping the realtors from flipping those houses themselves and pocket all the profit.
The buyer's agent can't just assign the property to another buyer, the first buyer has to actually agree to sell it along at the higher price. Of course, then the first buyer might have to go find another house to buy... The purchase price isn't paid until an actual closing, by the final buyer.
I really don't like this image, and I think it's pretty misleading. Where's the seller's agent pictured? Where's 'Buyer 1' agreeing to sell to 'Buyer 2' and so on...?
This is simply 3 rapid sales compressed into a single closing to save on the transfer taxes. Literally everyone wins.
How is this different from, for example, complaining that it's unfair for a stock to continue going up after you sell it?
I think part of the frustration comes from sellers who have an interest in who they sell their house to. Once the deal is signed and the original buyer flips the house (buyer #1) the seller now loses control of who ends up owning the house. It might be legal but that is little consolation to the seller who might have had reasons to sell, or not sell, to some party.
It seems like a grey area. In a market where buyers intentionally overpay above market prices to get the house of their choice and if everyone involved is aware and understands what they are getting into and more critically has options to negotiate a deal that is best for them, perhaps it makes some sort of free-market sense.
You're mistaking legality with ethics. The assignment clause makes it legal, but that doesn't mean that the brokers are acting ethically.
Ethics revolves around ensuring that everybody's interests are protected. A broker is supposed to be a neutral party that does not have an interest in the transaction. The seller's interests are not being represented.
The real estate agents are clearly violating their fiduciary duty to all non-agent parties involved in the transaction by misrepresenting the market value of the property.
The average property owner doesn't understand the market and is expecting the real estate agent to provide accurate price estimations.
I don't understand, ethically, how this sort of thing could be legal as its clearly a clause meant to allow misrepresentation to take rubes for their money.
I feel like there is a lot of opportunity for the agent to act like they are working for the seller while not informing them fully of their knowledge of the market.
If they are acting like an adviser, there's something at least a bit smarmy about not actually advising. If they were simply interested buyers, its harder to impute an obligation to the seller.
The article mentions that the buyer's agent find another buyer who will pay more than Buyer #1. So, what's the problem with that?
The buyer's agent has a fiduciary duty to the buyer, not to the seller. If the buyer's agent convinces the seller to sell at a price below market, and then finds Buyer #2 to buy at market, and Buyer #1 picks up the profits, that's a great agent ... for the buyer.
The seller should have his own agent, who's job it is to find the highest bidder and to not sell below market.
My impression from the article was that the sellers didn't have independent agents. They were approached by the buyer's agent when not even listing their house.
Definitely seems that the buyers agent offered to also act as the seller's agent and probably threw in a "we can reduce our commissions if we are on both sides of the deal" type of offer.
I had my own experience buying my first home, the new construction condo agent told me that I didn't have to have a buyer's agent and could just deal with them but the more I did my research the more I realized that my agent would be legally required to represent my best interests and could do a better job advising me on a process that might seem intimidating to a first time buyer.
I can understand why some of these sellers said "YES!" when someone knocks on their door and offers them cash that's equivalent to a lifetime's worth of savings but there is some fault to be assigned to seller's who don't do their due diligence. If someone says they'll pay cash right away to you, you have to think that perhaps you should see if there are other buyers in the market.
It sounds to me like the solution is to introduce legislation where the seller receives the final closing price (minus fees and commissions), not the pre-close sale price. Assign as many times as you want prior to closing the deal, but if that $2M house gets reassigned a few times and ultimately closes at $2.6M, that's what the seller should receive. Essentially, the sale isn't complete until the property is actually transferred.
This would protect the interests of the seller and align the agents with their interests, something which is required to happen in theory but seems lacking in practice with rules easily skirted by an agent making laughable claims like "oh, I wasn't aware that I would be interested in having a financial stake in this property until an hour after the buyer accepted the offer".
Why do you (as the seller) care if the contract is assigned? You agreed to sell the house for X dollars on Y date. You get X (minus commissions) on or before Y date and you're good. Whether the house is resold (or the contract assigned) 0 or N times isn't your concern. You took a price that you're happy with and got it. Whether another buyer was willing to pay a higher price 5 minutes, 5 days, 5 months, or 5 years later is not your concern, IMO.
I bought both of my houses with an "or assigns" clause in the offer. In both cases, I expected to (and did) move into the house as my personal residence, but if a seller balked at the "or assigns" bit, I would have walked on the first house and not sure on the second house. Why? Because I may want to assign the contract to a trust, partnership or LLC, in addition to the freedom it gives me to assign to another buyer.
The couple in the article were OK with selling their house for it to razed and a new structure built, but weren't OK with the new buyer selling the house to someone else?! That makes no sense to me...
What's happening is that the house is not being resold. The sale isn't complete until the property is transferred to the new owner, who assumes the title. I explained this elsewhere [0]. If I were selling my place, I'd be happy to have you assign as many times as you want, whether it's to assign it to your holding company or to another seller if you're unable to complete on the deal. However, I would insist on receiving the completed sale price since that is the time at which the sale and transfer of the property happens; because I still own the property, it is still my concern. Upon taking ownership of the property, if you then wish to re-list the property on the market and try and get a better price that is no longer my concern.
I get that the legal ownership is not literally changing hands multiple times (mostly because of the comical inefficiency of the real estate market and the effect of transfer taxes).
As a seller, you agreed to price X. As a buyer, I contracted with you (the hypothetical you) to ensure you are paid X. I then do some legwork and find another buyer for X+P, and assign the contract to them. At closing, you get ~X; I get ~P; new buyer gets the property, and a bunch of do-littles in the process take a bunch of fees, expenses, taxes, and commissions off the table. I don't see the problem for you or I. You do and I acknowledge that.
You can feel free to insist (in the contract) that, under those circumstances, you are due X+P, and what you'll find is that the subset of the buyers who wish to assign the contract won't deal with you (you've taken their economic value add away), but you'll eventually sell the house. It might be for X - L, where L is the loss you take by excluding that subset of buyers, as remember that X was the highest offer you were able to find otherwise and that was from a buyer that you've now excluded. But at least you can feel good that you got the "full value" of the transaction.
When P is $1M, as the article describes, I (putting myself in the seller's shoes) am not getting market value for the property; I'm only getting about 80% of market value. That's the problem I see and it really has nothing to do with you or your ability to make P on the property. The selling agent should have worked harder to capture at least a portion of that $1M, particularly since that $1M came at little to no risk for the chain of assigners. Additionally it may be the case that the buyer's agent purposely withheld a buyer, hoping to low-ball the seller, assign the purchase to themselves, and then sell the property for an offer that they could have brought to the seller in the first place.
The only reason this is possible is because the market is inefficient and I'd like to see more efficiency introduced into the market, whether that comes through legislation or via technical means, so that people aren't leaving $1M on the table to be scooped up by others. In reality that $5.2M property which ultimately closed at $6.2M might have sold for $5.7M, earning the family another $500K and saving the real buyer $500K.
Additionally it may be the case that the buyer's agent purposely withheld a buyer, hoping to low-ball the seller, assign the purchase to themselves, and then sell the property for an offer that they could have brought to the seller in the first place.
If the buyer's agent is acting on behalf of the buyer, they were under no obligation (legal certainly, nor ethical or moral, IMO) to bring that higher offer to the seller. (Real estate law and practices are hyper local; around here [MA, USA], a "buyer's agent" owes a fiduciary obligation only to the buyer and is allowed (and in fact would be required) to not disclose the presence of this other potential offer as by the "undivided loyalty" clause, they are "prohibited from advancing any interests adverse to the principal's [read: buyer's] interest or conducting the principal's business in such a way as to benefit a customer, a subagent, the agent or any other party to the detriment of the principal's interest." In other areas, that might not be the case.)
In that case, it is the listing/selling agent's responsibility to advise their client (the seller) that the offer is too low and they should wait longer.
That would not work. Suppose Bob offers $1M for your house and you accept. 10 minutes later Charlie comes along and offers $1.2M. Why would Bob get out of that contract, when he knows that he can resell it to Charlie and make $200k minus the transfer tax (assuming you cannot reassign the contract). The only difference between allowing or disallowing reassignment is how many times the transfer tax is paid. Or if you're a sentimental seller and actually care about who buys your home.
It is already priced in, IMO. The prospective buyer submits an offer incorporating all terms, including the assignment option just as much as the dining room chandelier.
And to think that I thought the Vancouver real estate market was crazy back in 2005...
This story is very relevant to tech. As much as I would love to, I wouldn't even think about locating a new business or office in BC today. And I'm sure I'm not alone. Attracting and retaining good employees is just too difficult when housing is more expensive than San Francisco - in a city where pay and buying power is much, much lower.
I wonder why the sellers are miss pricing their homes by so much? I guess there is an aspect of trusting the agent too much, and a lack of experience making such lucrative deals (I think I'd still love the chance to make a horrible deal on $3 million of appreciation).
As someone who used to sell services to real estate agents...
Their incentives are not aligned with the seller or buyer of the home but with their ability to generate a commission per hour of labor.
Selling your house at $180,000 in 30 hours is far more lucrative than selling your house at $200,000 [fair market value] in 90 hours.
A substantial number of them will opt for the former rather than properly advising the seller.
The buyer's agent will do the reverse as their commission size is based on making the sale and the larger the dollar figure, the greater their commission. [e.g. Nudge you in the direction they think will maximize their reward for effort, such as encouraging you to pay $205,000 on a $200,000 property so there isn't any real negotiation.]
I believe it was Freakonomics had a section that covered this - When real estate agents themselves sell their own houses, they stay on the market longer than average.
Where it gets tricky is the agent has a fiduciary duty to the client. Making multiple deals isn't int he interest of the buyer. Not sure about Canada though.
If only all real estate agents were transparent and accountable agents in the AI sense, hard-coded with fiduciary duty to their clients. Working on it... :)
I do think there's some confusion in these comments about buyer vs seller agent, but that goes back to the fact that traditional real estate deals are often murky and intentionally obfuscated to benefit the brokers.
Similar to this happens all the time in India. Seller1 sells his property to buyer1 and gives all the property papers after transaction. Before _registering_ this property with the government Buyer1 finds another Buyer2 and sells the property. Buyer1 now avoids paying tax which is what registering property is.
When they demolish and sell in Vancouver its given to the lowest contractor bid so will fall a part in a few years. Common to see huge cracks in new house walls, uneven garage doors that can't close and loose tile work galore. Glued together homes sold to absentee buyers made to last until next sale.
It's not flipping. Flipping is where Bob fully completes the purchase of a property from seller Alice, Bob pays the property transfer tax [0], Bob takes possession of the property as the new owner on the title, and then Bob re-lists his property on the market at a new price, ultimately completing the sale to Charlie.
What's happening here is that agents involved in the sale of Alice's property provide Alice with a price of (for example) $1M, which Alice accepts under the assumption that her agent is representing her interests fairly and objectively. After Alice accepts this price, the purchase is delayed. While Alice waits to receive $1M for the sale, Eve (another agent) is assigned the property and sells the assignment to Bob for $1.25M. Bob then sells his assignment to Charlie for $1.5M. Charlie then completes the purchase, and only then is the property transferred from Alice to Charlie. Charlie pays $1.5M, but Alice receives only $1M. Eve and Bob both profit $250K each, never having taken possession of the property themselves.
I don't think there's a strict definition of flipping. What's happening here is much closer to flipping than arbitrage for any sensible definition of those.
One part of that article that stands out is that this is possible because the seller is generally not getting market value, which implies that the seller's agent isn't doing a great job of representing them:
"This practice is often frowned upon in the real estate
community since it seems unethical or illegal. In practice
there is nothing illegal about wholesaling or assigning
rights to a purchase contract even if it is multiple times.
It is important to understand that the reason there is an
opportunity to wholesale is because the original seller is
selling the property for substantially less than market
value."
wonder what these houses are getting appraised at. and if appraisals are just ignored and/or disclosed. I would think an agent that sells a house with knowledge of an appraisal that was 300k below what it sold for without disclosing could get in a lot of trouble.
It is an interesting question why the sellers are mispricing their homes by as much as 30%, but if you know anything about the Vancouver real estate market, it is perhaps not that surprising: numbers move very fast, a lot of inexperienced non-investors own property (that they have usually owned for a very long time) and have perhaps never been involved in a deal of such scale.
If I were the buyer in the first transaction, however, I'd be very upset with my real estate agent though: his job was to advise me, not to be my adversary in an internal negotiation. He did not act in my interest, despite representing himself as my agent. I would be promptly reviewing my real estate contract and the real estate laws in my province for words like "fiduciary duty" and given the size of the transaction, probably consulting a lawyer.
A stark reminder that real estate agents are not your friend -- and actually, that is true regardless of what side of the transaction you are on. They are almost always paid by the selling party and still even have non-aligned incentives even for that party: preferring to get a sale done quickly than to get a better price for their client (as they only earn a fraction of the increase, but there is a high fixed 'minimum' property price in any given jurisdiction; a second sale will do much better for them than a 5% increase in their current sale).