Real Estate Broker Arbitrage in Vancouver

http://www.theglobeandmail.com/news/investigations/the-real-estate-technique-fuelling-vancouvers-housing-market/article28634868/

by cpymchn • 10 years ago

60 68 10 years ago

theglobeandmail.com

JTon• 10 years ago

Here's an image from the article that explains it all:

http://www.theglobeandmail.com/news/national/article28634862...

fweespeech3• 10 years ago

How that is legal, ethically, I'll never understand.

mgirdley• 10 years ago

It's totally ethical.

The contract is very clear when it says, "Buyer and/or assigns." In most states, that is written at the very beginning of the contract as well.

grok2• 10 years ago

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.

neonhomer• 10 years ago

It seems like being Buyer #1 or #2 is a great spot, as they walk away with $300k without doing that much.

analyst74• 10 years ago

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.

shimon• 10 years ago

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.

zaroth3• 10 years ago

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?

jeremy_wiebe• 10 years ago

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.

gburt• 10 years ago

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).

maxerickson3• 10 years ago

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.

sbarre2• 10 years ago

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..

frandroid• 10 years ago

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.

kohanz2• 10 years ago

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.

lazyant• 10 years ago

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.

jpmattia2• 10 years ago

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.

zaroth3• 10 years ago

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.

zardo2• 10 years ago

They are almost always paid by the selling party and still even have non-aligned incentives even for that party

I would say they're always paid by the buyer. No matter who pays for it in the contract, the buyer is the one bringing money to the deal.

amscanne• 10 years ago

buyer's money => seller => agents.

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.

oh_sigh• 10 years ago

If I were the buyer in the first transaction, however, I'd be very upset with my real estate agent though

Presumably the first buyer is aware of what the agent is doing, and is okay with it. The first buyer gets $300k out of it (but no house).

maxerickson3• 10 years ago

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).

fweespeech3• 10 years ago

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.]

jcdavis• 10 years ago

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.

buzzdenver3• 10 years ago

This is house flipping, not arbitrage.

biot5• 10 years ago

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.

[0] The tax is charged at a rate of 1% for the first $200,000 and 2% for the portion of the fair market value that is greater than $200,000. Source: http://www2.gov.bc.ca/gov/content/taxes/property-taxes/prope...

buzzdenver3• 10 years ago

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.

matrix• 10 years ago

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.

fleitz• 10 years ago

It's not more expensive than SF, don't read reports look at prices. If you work in tech SF is a lot more expensive than Van.

biot5• 10 years ago

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".

sharemywin3• 10 years ago

just don't sign a contract with an assignment clause.

sokoloff4• 10 years ago

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...

reverend_gonzo• 10 years ago

Where's the seller's agent in all of this?

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.

1138• 10 years ago

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.

calbear81• 10 years ago

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.

sharemywin3• 10 years ago

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.

wired8• 10 years ago

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.

jb55• 10 years ago

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...

sbarre2• 10 years ago

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).

mrmch• 10 years ago

Vancouverites -- Victoria is a very real option. You don't have to sacrifice ocean or mountains, and can afford to buy a home (and then some).

https://github.com/sendwithus/vic-startup-jobs

cylinder• 10 years ago

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.

sharemywin3• 10 years ago

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.

rgbrgb5• 10 years ago

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.

msie• 10 years ago

Don't complain about your block becoming a ghost town if you're selling too.

pakled_engineer• 10 years ago

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.

holigey• 10 years ago

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.

Real Estate Broker Arbitrage in Vancouver

Related Stories