Avoid getting mixed up in a fraudulent real estate flip

Do not confuse legal flip with fraudulent flip

Please note: the flip mentioned in this article constitutes a fraudulent transaction, not to be confused with a “fixer-upper” style flip, in which the higher resale price may be justified by renovations made to the property.

A flip is a scheme that real estate brokers must be aware of and avoid. This manoeuvre has been a source of great concern to the OACIQ in recent years. It consists in the quick and successive sale of the same property with a substantial and unjustified price hike. Both transactions frequently take place the same day, mere minutes apart.

The instigators of the flip, often part of a structured organization, first simulate an interest for a property by presenting a promise to purchase to the seller, when in fact they have no intention of buying the property for themselves. Simultaneously, a second promise to purchase for a much higher price is drafted between the “flipper” and a buyer. This buyer’s financing is often secured by the organization itself, and the file usually includes false documents inflating the buyer’s financial situation.

With a notary’s participation, the organization first closes the sale with the buyer. Then, with the money from this sale in hand, the details of the initial promise to purchase presented to the seller are finalized and the transaction is concluded. Thus within a few minutes the organization makes a profit, i.e. the difference between the price of the two transactions.

This scheme violates several of the rules of professional ethics that govern real estate brokers, including those relating to integrity, fair treatment of the parties to a transaction, and acting with objectivity in the course of a transaction. The Discipline Committee takes very a serious view of real estate brokers who take part in such transactions, which have disastrous consequences and can cause a major prejudice to several parties, including:

• damage to the buyer’s credit and financial reputation, or even bankruptcy due to having paid too much for the property compared to their means and the market;
• losses to financial institutions that are conned into lending against an immovable that is worth less than the loan it secures;
• undue upward pressure on real estate prices created by the artificially inflated prices of flipped properties;
• selling price of the flipped property too low in the first of the two successive sales, causing a financial loss to the first seller.

Under no circumstance should a real estate broker engage in such transactions, nor allow them by wilfully turning a blind eye.

Overview of disciplinary decisions

The involvement of brokers in real estate flips has been penalized many times in the past by the OACIQ Discipline Committee. These brokers engaged in schemes that often went as follows:

• A buyer contacts an organization that offers financing solutions which he finds attractive;
• Detailed description sheets of properties, selected because they lend themselves well to a flip, are submitted to the buyer;
• Once the buyer finds a property that interests him, his broker, who is in league with the organization, takes him to see the property without explaining the successive selling scheme that the organization intends to do;
• If the buyer is interested in buying the property, the real estate broker prepares a promise to purchase on behalf of the organization, and the organization buys the property through a numbered company or a nominee holder. Another promise is drafted simultaneously between the buyer and the organization at a price that is much higher than what the organization has offered to the seller;
• The initial seller and the second buyer are often unaware of the identity of the other party;
• The notarized deeds are signed on the same day, and the organization receives as payment the financing obtained by the subsequent buyer;
• The organization thus finances its purchase with the loan obtained by the buyer.

The mechanics of the scheme may vary, but the result is more or less the same, and brokers can recognize it if they keep in mind the main characteristics of a flip, which are the rapid and almost simultaneous purchase and resale of a property, with the pocketing of a profit unbeknownst to a buyer and to the detriment of a financial institution.

When a real estate broker takes part in such transactions, our profession’s credibility with financial institutions and the public suffers. Such involvement is considered a serious offence that can lead to a suspension of the broker’s licence for several months, sometimes even years. Real estate brokers should have no part in these transactions. When faced with a situation that looks like what is described above, open your eyes and don’t hesitate to denounce it as an illegal practice.