Feb 2016 10

Real Estate in January 2016: Vancouver Still the Wild West in Terms of Unethical Practices

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Such excitement and excuses and hand wringing by the regulatory bodies after the investigation by the Globe and Mail into the cause of the high real estate prices in Vancouver has shown that BC is still the Wild, Wild West in terms of opportunities for unethical practices, money laundering and tax evasion.

Since 2010 we have been warning sellers in Richmond not to fall into the quick and easy money trap of believing representatives who knock on their doors to ask them to sell their home today to an offshore buyer who loves it and wants to live in the neighbourhood. The grift is that the seller is discouraged from taking the time to receive professional advice as to value: the deal has to be completed today often with a long closing for the seller to find another home.

Minimal Lookup by Maciek LulkoMinimal Lookup by Maciek Lulko

This allows the "buyer" to sell the contract two or three times to investors before finally transferring title on contract completion date to an offshore investor who pays an extra $500k for the property to the middle men who have defrauded the seller of the true price of their home.

The heavily researched Globe and Mail article highlighted Richmond sellers who sold their parent’s home for $1.6 million, having been told the property could not be subdivided, through someone who knocked on their door. The new buyer found a way around the subdividing regs and built two $3 million homes on the subdivided property. It was a legal but unethical action on the part of the buyer.

In the Westside of Vancouver where the sale prices for older homes to be razed is in the multi-million $$$ range there are a number of upset sellers who discovered on closing or afterwards that the final buyer paid up to $2-3 million dollars more for the property than they received from the sale.

The sad thing is that for the most part this fraud is legal. The BC Contract of Purchase and Sale has a clause in it that allows assignment of the contract to another purchaser who will pay the original buyer for his interest in the property. Because BC always had a resource based economy that offered "chicken or feathers" in terms of employment the clause was there to protect the seller if the buyer’s circumstances changed and they could not complete the purchase of the property. It is a useful option if the buyer has financial problems.

The article also pointed out that some real estate agents took advantage of the sellers by taking a piece of the action as the contract was sold forward through assignments until the final buyer took title and paid the Land Transfer Tax on the sale (formula: 1% on first $200k, 2% on balance of purchase price).

There is a lot of distress in the huge majority of honest ethical professional members of the real estate community. These actions reflect badly on everyone when it appears to be a small segment of real estate agents with offshore investor clients who are perpetrating these mostly legal frauds.

January Market ReportJanuary Market Report

We can take a hard look at the actions of the Real Estate Council of BC, the self-governing body of the real estate profession. On occasion they are perceived to be offering a minimal response to complaints of dual agency and misrepresentation. Letters sent to them outlining possible frauds have not been answered according to a real estate agent who sent them one. A serious complaint that is proved may net the offending real estate agent a 14+ day suspension. If the error is really egregious the offenders are allowed to resign without penalty.

A ubiquitous practice that is allowed in BC is Dual Agency or No Agency where the seller’s real estate agent represents all the parties in the transaction. This control makes it easier for the listing agent to assign the contract forward.

Hubris eventually catches up with those who advertise their many sales and profits from assignments and are confident enough to talk to an investigative journalist. The game’s afoot and the Real Estate Council, the Real Estate Board of Greater Vancouver and Members of the Legislative Assembly are hot on the trail of those who have not declared income, capital gains or their interest in real estate as a licensed salesperson.

The main reason that selling forward works is that we are still in a real estate market of rising prices and little inventory. One of the sources of the general unhappiness with offshore investors buying homes in which to park and launder their funds over time is that neighbourhoods are being destroyed by empty houses that are allowed to fall into a derelict condition. The City of Vancouver does not effectively enforce their bylaws regarding cleaning and maintaining the property. The rules in Australia are much tougher. Empty homes must be rented. Gardens must be maintained or the city arranges for maintenance and charges the owners. A lien against the property does wonders to focus the owner’s mind on maintaining his title free and clear of all encumbrances.

This inventory of empty homes, sold by assignment, prevents local buyers from participating in an open market to purchase a home in which to live. Due to changes in the immigration incentive programs from the Federal Government there are fewer Chinese citizens moving to BC as Permanent Residents. The Feds now offer a ten year Super Visa program where parents and grandparents can visit their Vancouver children for up to two years at a time. Given that anyone can buy a property in Canada without being a resident this is a very convenient way for investors to come and go and check out the available real estate.

After the Globe and Mail disclosures Gregor Robertson, Mayor of Vancouver, is calling for a tax on speculators. In January a group of 40 professors from the business faculties at UBC and SFU announced a proposed property levy to tax vacant Vancouver investment properties. It would be a non partisan tax on all properties left empty. It would not penalize those who rent the house or who are longterm residents away from home for a certain reason and length of time. The tax collected would be distributed to all residents. The professors’ thesis is that it is very difficult to add to the housing stock and every time a home is removed from it the prices increase for all home buyers.

An unintended consequence of the scarcity and stratospheric prices of detached homes has many more buyers focused on condos. There is a rising demand for housing and condos are more affordable and often closer in to the city. Surprisingly the schools with the largest increases in enrollment are the downtown elementary schools. Younger families are already choosing a condo over a townhouse in the suburbs. There is pressure from municipal governments on developers to build family size units but in Vancouver that just pushes the prices up to an unaffordable level. It’s the land component that comprises the largest share of the value of a condo unit as well as a house.

Vancouver City Skyline  Landscape by Asher IsbruckerVancouver City Skyline by Asher Isbrucker

There is speculation that in older condo complexes the owners may decide to sell themselves to a developer. This can be done if 80% of the owners agree to do so. The motivation for this possible move over the next few years is the requirement for all condos to commission a Depreciation Report. In some buildings the engineering report combined with the Reserve Fund Study have shown huge investments required to bring the condo complex condition and maintenance up to today’s standard. There are three models to choose from to implement the Depreciation Report and most are staggeringly high for the present owners. This is one reason for the popularity of newer buildings with the 2-5-10 third party warranty in place. Buyers are sure that they will not be hit with enormous costs for the infrastructure.

There is a call from all sides for the city to rezone areas for townhomes. Right now investors are snapping up city blocks of homes on main arteries because the City has indicated that they want to densify all transit routes with low rise residences above ground level commercial units. On main streets running through single family zoned neighbourhoods the City is permitting townhome construction. Young developers are buying up properties that larger developers don’t want as they are not yet rezoned. There are many entrepreneurs and investors willing to take the chance that in the drive to accommodate a growing population these streets and buildings will be rezoned. The City has designated sections of the Downtown Eastside as a "no condo zone" in order to keep available rental housing for the existing residents.

It will be interesting to see if the brouhaha over contract assignments will lead to any changes in the real estate regulations of contracts and business practices. The confidence of the public in the integrity of organized real estate services is to be cherished and nurtured and not undercut by the nefarious actions of a few bad actors.

In the meantime the market in January was in an early Spring mode. Sales were up 46% over the 10 year sales average for the month making it the second highest January on record. Listings are are at 6,685 which is a 38.6% decline compared to January 2015. With the sales to active listing ratio at 38% we are well into a continuing seller’s market.


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