
Real Estate Broker Arbitrage in Vancouver - cpymchn
http://www.theglobeandmail.com/news/investigations/the-real-estate-technique-fuelling-vancouvers-housing-market/article28634868/
======
gburt
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).

~~~
maxerickson
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.

~~~
frandroid
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.

~~~
rgbrgb
Is that what's happening? How I read it, the sale was being re-assigned to the
buyer's agent. It definitely means the seller's agent left some money on the
table for their clients, but not necessarily that they did so on purpose. I
guess that's why this exists... the seller's agent can point to incompetence
(unintentionally mis-pricing the home) rather than foul play.

~~~
pfarnsworth
He turned around and flipped it for $1M. That's fraud, not incompetence.

~~~
rgbrgb
Perhaps we're talking about different cases. I'm not seeing any home in the
article that's priced at $1M. I was talking about the first case where the
seller ends up selling to the buying agent (not their agent) who then marks it
up to the real market value. The seller's agent didn't officially have any
perverse financial incentives from that sale, other than the oft-cited
incentive to price low and sell quick that all brokers have [0].

[0]: [http://freakonomics.com/2008/02/26/real-estate-agents-
revisi...](http://freakonomics.com/2008/02/26/real-estate-agents-revisited/)

~~~
pfarnsworth
I re-read the article and I misread it, I thought they were selling to their
own selling agent. I guess they instead sold it to the buying agent. If that's
the case, then I guess there's nothing wrong since the selling agent is the
one that is guiding the sellers, although it sort of makes one wonder if there
was collusion going on.

~~~
rgbrgb
Yeah, I think the most troubling piece of this is how hard it is to figure out
if something illegal was going on. I'd say it's definitely a point in favor of
just listing your home on the open market rather than doing a pocket listing
(a private sale without listing). Even if you really trust your agent, pricing
a home is really hard and is best left to competing buyers. It sounds like a
lot of these sales were "listed" by realtors who already had an offer in hand
when they contacted the owner so they weren't really soliciting the open
market for highest and best offers (which is definitely a violation of their
fiduciary duties).

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wired8
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
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...

~~~
sbarre
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).

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

>
> [http://www.theglobeandmail.com/news/national/article28634862...](http://www.theglobeandmail.com/news/national/article28634862.ece/BINARY/w940/image.jpg)

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

~~~
mgirdley
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.

~~~
vinceguidry
You're mistaking legality with ethics. The assignment clause makes it legal,
but that doesn't mean that the brokers are acting ethically.

Ethics revolves around ensuring that everybody's interests are protected. A
broker is supposed to be a neutral party that does not have an interest in the
transaction. The seller's interests are not being represented.

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reverend_gonzo
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
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
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.

------
biot
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".

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

~~~
sokoloff
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...

~~~
biot
What's happening is that the house is not being resold. The sale isn't
complete until the property is transferred to the new owner, who assumes the
title. I explained this elsewhere [0]. If I were selling my place, I'd be
happy to have you assign as many times as you want, whether it's to assign it
to your holding company or to another seller if you're unable to complete on
the deal. However, I would insist on receiving the completed sale price since
that is the time at which the sale and transfer of the property happens;
because I still own the property, it is still my concern. Upon taking
ownership of the property, if you then wish to re-list the property on the
market and try and get a better price that is no longer my concern.

[0]
[https://news.ycombinator.com/item?id=11059602](https://news.ycombinator.com/item?id=11059602)

~~~
sokoloff
I get that the legal ownership is not literally changing hands multiple times
(mostly because of the comical inefficiency of the real estate market and the
effect of transfer taxes).

As a seller, you agreed to price X. As a buyer, I contracted with you (the
hypothetical you) to ensure you are paid X. I then do some legwork and find
another buyer for X+P, and assign the contract to them. At closing, you get
~X; I get ~P; new buyer gets the property, and a bunch of do-littles in the
process take a bunch of fees, expenses, taxes, and commissions off the table.
I don't see the problem for you or I. You do and I acknowledge that.

You can feel free to insist (in the contract) that, under those circumstances,
you are due X+P, and what you'll find is that the subset of the buyers who
wish to assign the contract won't deal with you (you've taken their economic
value add away), but you'll eventually sell the house. It might be for X - L,
where L is the loss you take by excluding that subset of buyers, as remember
that X was the highest offer you were able to find otherwise and that was from
a buyer that you've now excluded. But at least you can feel good that you got
the "full value" of the transaction.

~~~
biot
When P is $1M, as the article describes, I (putting myself in the seller's
shoes) am not getting market value for the property; I'm only getting about
80% of market value. That's the problem I see and it really has nothing to do
with you or your ability to make P on the property. The selling agent should
have worked harder to capture at least a portion of that $1M, particularly
since that $1M came at little to no risk for the chain of assigners.
Additionally it may be the case that the buyer's agent purposely withheld a
buyer, hoping to low-ball the seller, assign the purchase to themselves, and
then sell the property for an offer that they could have brought to the seller
in the first place.

The only reason this is possible is because the market is inefficient and I'd
like to see more efficiency introduced into the market, whether that comes
through legislation or via technical means, so that people aren't leaving $1M
on the table to be scooped up by others. In reality that $5.2M property which
ultimately closed at $6.2M might have sold for $5.7M, earning the family
another $500K and saving the real buyer $500K.

~~~
sokoloff
_Additionally it may be the case that the buyer 's agent purposely withheld a
buyer, hoping to low-ball the seller, assign the purchase to themselves, and
then sell the property for an offer that they could have brought to the seller
in the first place._

If the buyer's agent is acting on behalf of the buyer, they were under no
obligation (legal certainly, nor ethical or moral, IMO) to bring that higher
offer to the seller. (Real estate law and practices are hyper local; around
here [MA, USA], a "buyer's agent" owes a fiduciary obligation only to the
buyer and is allowed (and in fact would be required) to not disclose the
presence of this other potential offer as by the "undivided loyalty" clause,
they are "prohibited from advancing any interests adverse to the principal's
[read: buyer's] interest or conducting the principal's business in such a way
as to benefit a customer, a subagent, the agent or any other party to the
detriment of the principal's interest." In other areas, that might not be the
case.)

In that case, it is the _listing /selling_ agent's responsibility to advise
their client (the seller) that the offer is too low and they should wait
longer.

------
matrix
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
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.

------
maxerickson
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).

~~~
fweespeech
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
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.

------
sharemywin
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.

------
rgbrgb
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.

------
holigey
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.

------
pakled_engineer
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.

------
buzzdenver
This is house flipping, not arbitrage.

~~~
biot
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...](http://www2.gov.bc.ca/gov/content/taxes/property-
taxes/property-transfer-tax/understand)

~~~
buzzdenver
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.

~~~
biot
My understanding of flipping was what I thought to be a common-sense one.
However, upon researching it further I stand corrected:
[https://en.wikipedia.org/wiki/Flipping#Wholesaling_and_assig...](https://en.wikipedia.org/wiki/Flipping#Wholesaling_and_assigning_a_contract)

One part of that article that stands out is that this is possible because the
seller is generally not getting market value, which implies that the seller's
agent isn't doing a great job of representing them:

    
    
      "This practice is often frowned upon in the real estate
       community since it seems unethical or illegal. In practice
       there is nothing illegal about wholesaling or assigning
       rights to a purchase contract even if it is multiple times.
       It is important to understand that the reason there is an
       opportunity to wholesale is because the original seller is
       selling the property for substantially less than market
       value."

------
sharemywin
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.

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

