B.C.’s real estate industry could learn a thing or two from this one
How a regulatory body reinvented itself—and the important takeaway
April 12, 2016
Shadow flipping, as Vancouverites learned in February, is not solely the domain of secretive ninjas. When the Globe and Mail broke an investigative story on the practice, realtors found themselves in the crosshairs of public scorn. For the uninitiated, shadow flipping is when a buyer purchases a property for an agreed-upon price and then reassigns it to another buyer at a higher price before the sale closes, trousering the difference—often hundreds of thousands of dollars—without paying a dime in property transfer tax.
The practice has undermined the trustworthiness of certain real estate agents who’ve facilitated shadow flipping—and, in the eyes of some, the industry as a whole. “Public confidence in the real estate industry is practically at zero,” says Vancouver–Point Grey MLA David Eby. In March, the province announced plans to end shadow flipping; additional income generated from reassigning a sale now goes back to the original seller, negating the benefit of the practice. But this change came after a media firestorm—not from a regulatory body doing its due diligence. In terms of regulation, there’s still room for improvement, according to UBC professor Cristie Ford, one of Canada’s top experts on securities regulation. And B.C.’s securities industry is a model for how to do it right, she says. “It may be time for the real estate council to look at ramping up its capacities, structure, and its oversight of the industry to the same degree.”
Ford says that back in the ’80s and ’90s, the Vancouver Stock Exchange was “basically lawless. It gave Vancouver the reputation of being the scam capital of the world.” The B.C. superintendent of brokers, the securities regulator at the time, did not have the scope or structure needed to tackle rampant abuses. Famous stock promoter Murray Pezim, for example, pitched everything from rejuvenation pills to monogrammed fruit. The B.C. Securities Commission (BCSC), formed in 1996, was put in place to combat those abuses—and, ultimately, it succeeded. “The BCSC today has a much wider mandate,” Ford says, “with the right structure and resources to crunch data and stay ahead of possible negative or illegal practices in the market.”
In 2015, the BCSC disciplined 2 percent of its 2,726 licensees, permanently banned 29 licensees, and fined several individuals millions of dollars each. In that same year, the Real Estate Council of British Columbia (RECBC) received 536 complaints (which it largely depends on to open investigations) but disciplined only 75 of its 22,005 licensees—0.34 percent—and cancelled just one licence. Those that were disciplined were fined an average of $2,460, typically to recover enforcement expenses.
David Eby is familiar with the RECBC’s disciplinary record, and he’s not impressed. “When I look at the disciplinary decisions, I think to myself, gosh, I would have definitely stripped this person’s licence when, for example, they forged a real estate contract to increase their commission.”
As for the practice of shadow flipping, while reassigning a contract was never illegal (the assignment clause exists to give buyers a way to back out of purchases in exceptional cases), the RECBC did, and does, prohibit realtors from acting in a manner that’s contrary to their clients’ best interests. It’s the sort of behaviour that, in the securities industry, would no longer go unchecked—or unpunished.