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 The buyer in this case is real and is legally obliged to purchase the units unless the deals are rescinded within the 10 day cooling off period.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.