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Guard against 'flipping'

20 Jul 2005

As the residential property market shifts gears, sellers need to guard against an unhealthy real estate practice known as "flipping".

"This practice is rife in the US – despite being outlawed in terms of federal fair housing legislation – and generally begins with an agent or group of agents persuading a seller to accept a low price in return for a quick sale," says Lynette Malan, MD of the Property100 group.

"The rationale could be, for example, that prices in the area are in decline and that the seller should aim to get out fast, or that the property is in poor condition compared to others for sale in the same area."

What generally follows is a quick sale at the lower-than-market value – to a nominee of the agent or to a "buyer" colluding with the agent, who will then rapidly resell the property at true market value, and divide the profit with the agent.

In this way, the agent stands to make a tidy sum in addition to the commission paid by the unsuspecting original owner.

For example, on a R600 000 home sold for R550 000 and then "flipped" for R600 000, the agent could earn commission (at six percent) of around R33 000, plus another R25 000 (half the profit) – a total well in excess of the R36 000 commission he or she would have earned by selling the home for R600 000 in the first place.

Malan points out that the Code of Conduct in operation in SA prohibits an agent from buying – directly or indirectly – any property for which he or she holds a mandate unless the owner of that property is fully informed of the agent's interest.

"It also, of course, prohibits an agent from deliberately misrepresenting the likely market value of a property.

"But as the market cools down and it takes somewhat longer to sell properties, owners can become over-anxious, laying themselves open to some very creative bending of these rules.

"They need to guard against this, and the best way to do that is to obtain an up-to-date Comparative Market Analysis, and advice from a reputable local agent, before making any decision on pricing or re-pricing a property."

*Check on recent sale prices in your area with PropertySPI. Go to www.propertyspi.co.za

Guard against 'flipping'

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