How speculators make their money in real estate

I found this useful picture illustrating how speculators make their money in real estate.


Here is how they do it

One property is traded one or more times before a deal closes – legal but controversial flipping that creates opportunities for agents to make multiple commissions and investors to profit from houses that are not yet technically in their possession.

Legally, this is possible and is called an “assignment”. Person A buys the house and then assigns the right to buy the house to another person B. Person B pays Person A for this right. Person B can assign the purchase to another Person C. And all this can happen before the deal settles.

Because assignment sales are rarely listed publicly, they have created a thriving grey market that is accessible largely to investors, speculators and real estate agents who have insider information.

What’s more, the assignment market appears to reward neither the original seller nor the ultimate buyer, despite pushing prices higher and higher: Original Sellers receive less for their properties than what buyers are finally willing to pay at the end of the chain. And buyers – many of them foreign or backed by foreign investors – pay more than they would have to if the middlemen weren’t involved. In the meantime, the middlemen get paid for being an “informed” speculator.

This is particularly common for new properties that are bought off the plan. But it happens to properties that are located in sought after locations especially inner city suburbs.

And this is not only happening in New Zealand. This type of activity is common in other hot property markets such as Melbourne, Sydney and Vancouver.

What can be done?

Always choose an agent who has a good reputation and doesn’t engage in unethical behaviour. This is what it comes down to. It’s a question of ethics. If you want to get all legal, then a properly advised seller would insist on a no-assignment clause in the sales and purchase contract. But really if you choose an ethical real estate salesperson, you won’t have any regrets.

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