Within the unregulated world of Newspaper flipping in Canada

Each day, condominium developers in the nation’s hottest markets turn to the world wide web to track down an odd breed of opponents: their own customers hoping to flip preconstruction units without consent.

Builders in Toronto and Vancouver say their employees are always on guard for unauthorized advertisements or pre-sale flips in an attempt to ensure buyers are following strict rules spelled out in their sales contracts around time and advertising.

“You don’t need to be competing with your own product which you sold,” said Jon Stovell, president and CEO of Reliance Properties in Vancouver.

For most buyers, the ability to ditch condominium contracts before buildings are completed — called selling on paper or assignment flipping — provides a welcome escape clause if life circumstances change during the many years between occupancy and purchase. For property speculators betting on soaring costs, paper flips could be rewarding investments. And for programmers, assignments are often a source of headaches but a practice many say they feel pressured to allow for competitive reasons.

But unlike the resale market, preconstruction condo sales and newspaper overlaps are a private, unregulated corner of the business, without a public registries that track rules or transactions requiring developers to report duties to some government body. Builders presell the huge majority of units in their endeavors to receive bank financing which enables them to begin construction.

Nevertheless, in the wake of recent information about a Canada Revenue Agency crackdown on tax evasion in condominium missions, the presales industry is facing renewed calls for mandatory disclosure and tracking. Preconstruction condo flips — that were blamed for pushing up costs and adding volatility to the nation’s two largest housing markets — are also, sometimes, vehicles for money laundering and other unethical action.

“This notion that you would have this world where sales were being made with no official document, that is highly debatable,” said Josh Gordon, a professor at Simon Fraser University in British Columbia who investigates the Vancouver and Toronto home markets.

“In terms of being able to monitor transactions in a area such as this where you know that it’s subject to these sorts of issues, I don’t see why, as a government, you’d want to allow it to happen.”

Following The Globe reported on the CRA blitz, British Columbia and Ontario said they’re exploring a variety of options with Ottawa to monitor preconstruction condo flips. B.C. Finance Minister Carole James said registries are a part of the talks, while her Ontario counterpart, Charles Sousa, stated he supports disclosure but casts doubt on the viability of registries because current systems only capture ownership at closing.

Unlike the stock exchange, buying preconstruction condos requires deposits of just about 20 percent, while enabling investors to speculate on price gains for units’ entire values between the original purchase and the date of a reverse. However, any profits from selling presale contracts must be reported on income-tax yields and are generally fully taxable.

Developers in Toronto and Vancouver estimate that between 5 percent and 10 per cent of presale condos are reversed before buildings are finished. From the Greater Toronto Area alone, more than 26,000 new condominium units were sold in the first nine months of 2017, with predictions that this will be a record year. Despite recent slumps in home sales following the introduction of foreign-buyers taxes, the two cities’ overall condominium markets are flourishing.

There isn’t any official data on cost gains for presale condos offered on mission. But improvements completed this year at the Toronto area, as an instance, have appreciated by an average of 45 percent over the roughly five years because presales were established, from about $575 to $835 a square foot, based on Urbanation, a real estate consulting company. Values are also skyrocketing in Vancouver, with typical costs jumping between 60 percent and 80 percent from presale to resale in some recent projects.

Paper flips became more prevalent in Toronto and Vancouver as markets for new condos exploded in recent years. For home buyers making commitments about their housing needs a long time to the future, assignment clauses are important elements in many purchase decisions.

“It is something that’s offered, I think, nearly universally so it is more of a competitive thing. Consumers know of these and they ask about them,” said Jim Ritchie, executive vice-president of sales and marketing at Tridel, a significant GTA developer. “It will give the buyer a small amount of flexibility.”

However, builders say mission sales tend to be time-consuming, laborious transactions that could add danger to their jobs by increasing the odds of earnings not closing, in certain cases because buyers of flipped contracts {}. Developers generally require customers to receive permission to assign and allow such trades only when jobs are virtually sold out so they are not competing with newspaper flippers as they market their own leftover units.

The clinic also needs continuous policing by staff to make sure customers are representing jobs accurately and after rigid terms laid out in initial sales contracts, including around advertising, builders say. Some prohibit assignment advertisements on the industry’s Multiple Listings Service, social networking or sites like Kijiji and Craigslist.

The industry’s strict rules make locating buyers for presale condo contracts hard. “It is networking, that is about it. Smoke and smoke signals. That really makes it tough to market,” said Dennis Paradis, a realtor in York Region, who specializes in presale condominium missions. To sweeten prices, springs are often offered at slight discounts compared to current unit valuations.

Mr. Paradis said many people hoping to reverse contracts are desperate due to changed life circumstances, such as larger households, divorce or a need to relocate, and aren’t conscious of tax rules. “Certainly the tax consequences aren’t well known,” he said. “I don’t feel this is explained to a lot of men and women.”

For Jim Barker, finding a buyer for his presale contract isn’t about making money but instead part of the fallout of getting fired as general manager of the Toronto Argonauts in January. He is now facing a potential move to the United States and will not want the one-bedroom unit near Yonge Street and Eglinton Avenue.

“I am not trying to earn a whole lot of money from this,” said the 61-year-old, adding he is aware he might need to pay income tax on any gains. “I am trying to just get my money back from it so I can use it to go get something wherever I will be.”

Many developers charge fees which range from a few hundred to tens of thousands of dollars to process missions. Reliance Properties and the Jim Pattison Group recently increased the price for missions in their luxury-condo construction in Vancouver to 25 percent of their appreciation between the initial purchase price and the negotiated cost of the flip, as opposed to the original fee of 1 percent of the cost price. In the 2 years since presales started from the 53-storey tower, costs have skyrocketed.

“We were wanting to dampen the number of assignments occurring. We do not consider them to be especially helpful to the project,” Mr. Stovell stated. “We want to allow people still that chance to assign but we are sort of trying to get rid of a little bit of the impetus to just do it with no real need.”

Other contractors prohibit presale flips entirely. Toronto developer and real estate agent Brad Lamb does not let them because of the greater risk and drag prices for unsold units. “It hurts you as a programmer to permit assignments,” he said.

Nevertheless, a few customers still attempt to clandestinely find buyers for presale flips in his endeavors by putting advertisements online missing key details, like the building’s address or title. His team constantly scours a plethora of sites for telltale photos and calls and features sellers posing as potential buyers to confirm details. When they find fictitious ads, Mr. Lamb sends cease-and-desist letters and threatens to capture customers’ deposits and take back their units if such postings are not pulled.

Faced with persistent public anger over high housing prices and suspicion about the use of foreign buyers, Vancouver City Council recently passed a motion to offer local residents first dibs on new presale possessions, a move that the development sector dismissed as badly conceived and unlikely to fix the city’s issues. The move comes more than a year following the B.C. authorities imposed a 15-per-cent tax on purchases by overseas buyers in metro Vancouver. Ontario followed suit with a similar tax on earnings for the Toronto area in April.

As property prices in both cities climbed beyond the reach of many in the last few years, questions have been raised over preferential access to preconstruction condos allowed to industry insiders, whose customers — such as foreign investors — are in a position to purchase the very desirable and affordable units in popular developments prior to the people can even enter showrooms.

“There is a feeling that in the real estate world there are kind of favoured individuals and groups that programmers sell to and in the context of markets which are rising rapidly concerning cost, that creates the scope for a good deal of profit making. And if a few people and the general public in a way is systematically excluded from this, then there will be resentment as you essentially have sort of a property scalping lively,” Prof. Gordon said.

For non-Canadian investors, preconstruction condo flips provide a curious loophole. International residents who assign contracts don’t need to pay foreign-buyers taxes in Vancouver or Toronto since the levies are collected when jobs are finished. Offshore investors have to pay taxes on profits but audit recoveries are hard to pursue outside Canada. “It is going to be quite tough to track down that cash,” Prof. Gordon said.

In its extensive crackdown on tax evasion, the CRA is targeting preconstruction condo flips in Toronto and Vancouver. But so as to conduct research, the agency has been forced to go to court to obtain judicial orders requiring developers to offer information regarding trades, the only route available.

Asked how the agency selects which projects to focus on, spokesman Paul Murphy said in an email: “The Canada Revenue Agency reviews all property developer transactions which were identified as being at a higher risk of taxation non-compliance. Risk factors within this industry may include, amongst others, the size of a development or the amount of jobs overseen by a programmer” He said the CRA does not consider builders to be violating tax rules.

The CRA obtained court orders for 69 condo developments in the Toronto area this past year and found that a total of 2,810 flips. Approximately 100 of those trades are targeted for audits, 15 of which have already been finished. Of those, five cases led to reassessments that saw a total of about $70,000 in unpaid income taxes. The agency also received judicial orders for three condominium projects in the Vancouver area this summer, and has identified 50 mission earnings. Staff are still analyzing the information.

For its part, the real estate development business says it isn’t against providing records to the CRA but asserts that doing this without court orders would breach present privacy provisions. Many programmers also say they wouldn’t oppose new rules requiring them to report presale assignments, saying people should pay their fair share of taxation.

“I really don’t see the downside of it,” Mr. Ritchie said. “If that’s still available to a consumer, then so be it but they should understand the principles more clearly and, even if it is regulated, I guess they would.”

But many have concerns about what form such disclosures could take. Some programmers strongly oppose public registries for condominium presales and duties, noting they’re private arrangements between developers and home buyers to buy future units.

“Are we going to print all private contracts between private parties? You know, if you purchase a car, if you invest in stocks, then we are going to place a public registry of what stocks you own and so forth? I do not really understand why that would be necessary,” Mr. Stovell stated. “It is almost like trying to outside people just for doing a mission, even if it’s legal and they are paying the tax on it. … I’m a bit suspicious of the motivation{}”

Courtesy: The Globe And Mail

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