PHOTO: At the centre of the controversy is a transaction method known as a contemporaneous settlement. FILE
Six-Figure Property Flipping Deals Spark Industry Complaint
Concerns are growing in New Zealand’s property sector over the rise of so-called property flippers, with allegations that some are making massive profits by quietly on-selling properties before they even settle.
One of the country’s most prominent buyers’ agencies has now lodged a complaint with the Real Estate Authority (REA), claiming the practice is becoming increasingly common and potentially misleading for vendors.
Industry observers say some individuals are making more than $100,000 on a single transaction without ever actually owning the property.
The Rise of “Contemporaneous Settlements”
At the centre of the controversy is a transaction method known as a contemporaneous settlement.
In these deals, a buyer enters into a contract to purchase a property with a long settlement period. Before the settlement date arrives, they find another buyer willing to pay a higher price.
Both settlements then occur on the same day.
The flipper effectively profits from the difference between the two prices.
While the process is legal in many cases, critics argue it can be deceptive if the original vendor is unaware of what is happening.
Property Flipping Activity Surging
Recent housing market data suggests these types of transactions are becoming more common.
Market analysts say the number of contemporaneous sales rose sharply last year after a decline in 2023.
The increase has surprised some industry participants, with activity now reportedly higher than during parts of the pandemic-era property boom.
The trend has coincided with a renewed wave of property speculation and investment strategies being promoted online.
Vendors May Not Realise What Is Happening
Critics say one of the biggest concerns is that property owners often believe they are dealing with a genuine buyer.
In reality, the person placing the offer may simply be tying up the property contract while searching for someone else willing to pay more.
Some flippers reportedly secure contracts with 20-day due diligence periods, then immediately start marketing the property to potential buyers through private networks.
Prospective buyers may be introduced to the property under the guise of builders, valuers, or advisers conducting inspections.
But in some cases, they are actually being lined up as the eventual purchaser.
The Role of Property Mentoring Schemes
The growth in flipping activity is also being linked to a surge in property investment mentoring programmes.
These courses often promote strategies such as “no money down” property deals, teaching participants how to profit from property contracts without owning the asset.
While supporters argue the strategy is a legitimate investment approach, critics say inexperienced participants may not fully understand the risks or ethical implications.
Legal Grey Areas Around Property Trading
Property law experts say the practice sits in a complex regulatory space.
Individuals who buy and sell property directly are generally not required to hold a real estate licence, because they are acting as principals rather than agents.
However, complications can arise if a trader uses an unlicensed representative to help market or sell the property.
In those cases, regulators may investigate whether unlicensed real estate activity has occurred.
Risks for Buyers and Deposits
Legal experts also warn that buyers involved in these transactions may face additional risks.
When purchasing through a property trader rather than a licensed real estate agent, buyers do not always receive the same consumer protections.
One potential issue involves deposits.
If a trader experiences financial difficulty before the final settlement occurs, buyers could potentially lose funds if deposits are released prematurely.
Because of this risk, lawyers recommend ensuring deposits are held in a trust account until the original vendor becomes the registered property owner.
Calls for Greater Transparency
Some property professionals believe the key issue is not the existence of flipping itself but the lack of transparency.
Ethical operators say they make it clear to both vendors and buyers when a property contract is being on-sold.
Full disclosure allows all parties to understand exactly how the transaction works and what profit margins may be involved.
Critics argue that transparency is essential to maintain trust in the property market.
Regulators Now Reviewing the Situation
The Real Estate Authority has confirmed it receives regular enquiries about property-related activities and whether they fall within its regulatory scope.
While the authority cannot comment on individual complaints, officials say enquiries are sometimes investigated to determine whether licensing rules have been breached.
For now, the issue remains under scrutiny.
But as the property market continues to evolve and new investment strategies emerge, the debate over property flipping and consumer protection is likely to intensify.
SOURCE: RNZ