With high demand for luxury homes in cities such as Vancouver, there are now stories emerging of people buying houses, then flipping them to subsequent buyers before they even take possession. Here’s how it works.
A Quicker Flipper Upper
Usually, when we think of someone “flipping” a house to make a profit, we imagine someone buying a property, doing some renovations, then putting it back on the market and trying to sell it for more than they paid for and invested in the property. But in the luxury home markets, some of the “winners” of bidding wars for high-end homes have then transferred the sale on to other interested parties without ever taking possession.
The practice, known as a “contract assignment” (where the contract of sale is assigned to a third party) is fairly common in the condo market. This is where buyers make minimal deposits on low-priced pre-construction developments, then hold on to them until closer to the completion date in the hopes that the value of the condo will rise so they can sell the unit(s) for a profit without ever setting foot in them.
It doesn’t always work: in some cases condo projects get cancelled before completion due to financial or zoning issues, but investors still get their deposit back. (For details on some of the potential downsides of buying a condo at the concept phase, click here.)
Feeding a High-Priced Buying Frenzy
But with bidding wars driving some sale prices hundreds of thousands of dollars over asking, some buyers figure they can make a quick profit by putting their winning bid back on the market.
According to Sotheby’s International Realty Canada, there were 219 homes that sold for $4 million or more in Vancouver in the first half of 2015, a 71 per cent increase over the previous year.
At those prices, it’s conceivable that someone who really wants a house would be willing to pay an additional 10 or 20 grand or more to a less-invested buyer to take it off their hands.
Given that the title hasn’t actually changed hands yet, there will be no additional land transfer taxes or real estate fees on such a deal. The only cost would be legal fees to draw up the contract.
Royal Pacific Realty Group, based in Vancouver, has posted a sample of what such a contract would like on its website.
Would you buy or sell a home via contract assignment? Tell us in the comments below.