Posted on December 6, 2010 by Chris Jaglowitz

What is a "phantom buyer?"

In a blog post last week entitled “Let’s put an end to phantom buyers,” Toronto Realtor Andrew la Fleur wrote an open letter calling for an end to a “significant problem” he describes as follows:

Phantom Buyers is a term that I have coined for buyers of pre-construction condos who are not really buyers. Usually what happens is this: when a new condo launches of any significance in the city, a large number of Realtors will camp out for several days to be first in line when the VIP broker event takes place. Many of the Realtors who are in the first several spots in the lineup do not have any actual clients who want to buy! These agents will buy units in their own name (usually the cheapest units available), and then they will use the 10-day rescission period to try to find an actual buyer to take the unit(s) they have ‘reserved’ in their name.

He then goes on to explain how those agents try to unload these units and then gives some reasons why the practice should be halted.

There are two problems with the passage above.

First problem: Mr. la Fleur did not coin the term “Phantom Buyers.” He’s at least 15 years too late for that. It is because he uses the term incorrectly, however, that I make this response to his post.

Second problem: Using the term “Phantom Buyers” in the scenario described above is plainly wrong. A Realtor waiting in line and buying up multiple condo units is not a phantom buyer. It’s simply a Realtor behaving like a scalper. Instead of baseball game tickets, condo units are being gathered up quickly for the sole purpose of assigning or reselling them, presumably for a profit or for the right to charge a commission. The buyer in this case is real and is legally obliged to purchase the units unless the deals are rescinded within the 10 day cooling off period. What Mr. la Fleur describes is not a phantom buyer.

In actual fact, a “phantom buyer” is typically a major part of a financial fraud that has real victims (usually banks) that suffer real losses.

In earlier days, phantom buyers were non-existent buyers who entered into agreements to purchase pre-construction condo units as part of a scheme by developers to prompt their construction lenders to advance the next portion of the loan where the timing of the loan advances was tied to the percentage of units sold. In most of these cases, the developer would use the funds to finish construction and then sell the units (to a real buyer) in order to pay off the construction loan.

More recently, the term is associated with a common mortgage fraud where a fictitious buyer, usually with the help of a dishonest lawyer and/or loan officer, gives a mortgage on newly-purchased property, takes the mortgage money and disappears. A prime example of this from New York State is reported here. This type of fraud is extraordinarily prevalent and has given rise to a massive strengthening of regulations requiring lawyers, real estate professionals and others to verify the identities of homebuyers. Those regulations are described in the Canadian Bar Association’s National magazine here (pdf).

In the scenario described above by Mr. la Fleur, no one suffers any real monetary loss. Neither banks nor developers stand to lose a dime and, in fact, the developers probably benefit from the buzz and the artificially increased values.

If real estate professionals want to clamp down on this practice of scalping which, on its face, appears to be a permissible form of capitalism that some condo developers probably sanction, they need only petition their own industry associations (TREB, OREA, CREA) and their regulator (RECO) to prohibit such conduct.  They should do so!

If that method is not effective or if the involvement of the development industry in this practice needs to be reviewed, another option is to call the Competition Bureau. Those good people appear to have had considerable success in dealing with real estate issues in recent months.

In the end, most folks would likely agree with the concept of prohibiting artificial and disruptive forces in the marketplace and it seems that Mr. la Fleur’s motive is to level the playing field for consumers. He should be commended for that.

Let’s just be careful to not confuse the public about what a phantom buyer really is.
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Posted on October 21, 2010 by Chris Jaglowitz

Tarion to prohibit shady practice

Once every six blue moons, Tarion proposes a change to the Ontario New Home Warranty Plan that actually benefits purchasers of new homes without giving any kind of benefit to homebuilders or developers. This is one of those momentous, rare occasions.

In mid-October 2010, Tarion gave notice of its proposal to amend its regulations to combat the rather disreputable practice of a small number of condo developers that charge purchasers the [over]estimated municipal taxes or development charges for new units without refunding the difference if a lesser amount was actually paid to the municipality. This practice of developers pocketing the difference was described months ago in the regular newspaper column of Toronto real estate lawyer Bob Aaron. See his articles here and here. He called for some change to be made.

Luckily, Mr. Aaron is a member of the board of the Tarion Warranty Corporation and it seems that he has successfully persuaded Tarion to do something about this!

In the notice of the proposed amendment to its regulation, Tarion summarized the measure as follows:

Tarion would like to ensure that builders are not including charges as adjustments to the purchase price of a new home that have not actually been incurred by the builder. This amendment to the regulation will make the restriction of these charges a new term and condition of builder registration.

The actual proposed wording of the prohibition to be added to Tarion’s regulation is as follows:

The registrant shall not charge as an adjustment or readjustment to the purchase price of a home, any amount as reimbursement for a sum payable to a third party unless and to the extent such sum is ultimately paid to such third party.

This change, if passed, should persuade those few bad apple developers to stop the unfair practice of pocketing the difference between what they collect from purchasers and what they remit to municipalities or others. Indeed, a developer found in breach of this provision stands to lose their Tarion registration. While the proposed change does not provide a direct way for consumers to recover the difference, it should allow purchasers a certain amount of clout when negotiating with developers. It may also give rise to a legal right to sue a developer for that difference in court if need be.

Public input is being received until November 25, 2010. Comments can be submitted electronically through the Regulatory Registry on the ServiceOntario website.  Give your two cents today. 

Hats off to Bob Aaron and Tarion for taking this step to enhance consumer protection!

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Posted on September 4, 2009 by Chris Jaglowitz

Deposits are safe, but what about money paid for upgrades?

A troubled condo project in Ottawa is being taken over this week by the developer’s major creditor. The Ottawa Citizen reports that this creditor announced it is terminating the existing purchase agreements and that:

The former purchasers of the condos were told they would receive their deposits back. But it’s not clear about other expenses, such as upgrades and fixtures that have already been purchased.

This situation illustrates that while a purchaser’s deposit for the purchase price is protected by section 81(1) of the Condominium Act, 1998 (“the Act”), not all monies paid to a developer are covered by this statutory requirement that money be held in trust by the developer’s lawyer or another trustee.

Clause 81(2)(a) of the Act provides that the section 81(1) requirement for deposits to be held in trust does not apply to money received “on account of the purchase of personal property included in the proposed unit that is not to be permanently affixed to the land.”  Such excluded items might be moveable appliances, hanging artwork, curtains, furniture, decorative pieces and so forth.

On the other hand, money paid to a developer for built-in appliances and permanent upgrades to the proposed unit (such as counter tops, bathroom fixtures and hot tubs) will be protected by the section 81 trust provisions so long as the acquisition of these items is clearly included in the purchase of the proposed unit.  The structure and wording of the agreement are deciding factors.
   
Money paid to a purchaser’s own contractors or other third parties for things such as custom design, additional work or the supply/installation of special items or fixtures enjoys no protection under section 81 at all.  

This story from Ottawa reminds us that purchasers who pay for extra work or improvements outside the scope of their purchase agreement with the developer stand to lose that money if the developer becomes insolvent.    Here, the purchasers are finding that improving or customizing a proposed unit prior to taking possession is inherently risky.
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Posted on August 29, 2009 by Chris Jaglowitz

1 Bloor purchasers may lose their dream but not their deposits

The saga of the doomed luxury condo development at 1 Bloor in Toronto took an interesting turn earlier this month when the project was sold.

Great Gulf Homes announced that it had purchased the land at the corner of Yonge and Bloor Streets from developer Bazis International as part of a court-approved process to keep the project from falling into receivership. Bazis had initially purchased the land for $61 million but had defaulted on its loans before construction could begin.  

Despite the insolvency of the developer, those purchasers who braved the cold and lined up outside for days in late 2007 to buy units at 1 Bloor won’t lose a dime of their deposits (reportedly over $70 million). They can thank section 81 of the Condominium Act, 1998, which provides that deposits paid for the purchase of proposed condo units must be held in trust by a trustee or a law firm.  Section 82 provides that developers must pay interest on these deposits. 

Though their deposits are safe, those who purchased units at 1 Bloor are wondering what kind of condo they are going to get for their money.   The fate of the project won’t be known until after the sale to Great Gulf Homes closes in September but the new concept will probably be far less ambitious than the 80-storey, half-billion dollar skyscraper that was originally planned.  GMA's very own Gerry Miller shared his view on the project in this article in last Friday’s Globe and Mail.

Update (Sept 4/09):   Kris Scheuer of the Town Crier reports on her blog that 1 Bloor purchasers are now being refunded their deposits.

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