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Ze Yu Wu, the owner of beleagured New Coast Realty, leaves his Richmond office April 4, 2016.

John Lehmann

A real estate company named as a defendant in a "shadow-flipping" lawsuit says it followed industry rules and was unaware of any misconduct by two businessmen involved in a deal to buy a Richmond home and then flip it for a higher price.

Investigation: The real estate technique fuelling Vancouver's housing market

The lawsuit, filed by two brothers who sold a house when they were executors of their mother's estate, names Amex-Sunrich Realty as a defendant, along with real estate agent Alban Wang and businessman Ze Yu Wu.

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"Amex-Sunrich Realty fulfilled its responsibilities as a licensed brokerage in compliance with the rules set out by the Real Estate Council of B.C. with regards to the deal between the plaintiff, and the defendant Ze Yu Wu," the company says in a response filed recently with the Supreme Court of British Columbia.

The lawsuit centres around a form of contract assignment that's become known as shadow flipping, in which a property is resold to a new buyer before a deal between the seller and a previous buyer has closed. The practice was the subject of a Globe and Mail investigation earlier this year, which prompted the B.C. government to introduce rules to prevent realtors from being involved in such deals.

Shadow flipping lawsuit

One of the defendants, Mr. Wu, is currently the owner of New Coast Realty, a brokerage that was placed under restrictions following a Globe investigation into that company.

The plaintiffs in the case are two brothers acting as executors for their mother's estate. Kenneth and James Davis's lawsuit, filed in May, alleges they accepted an offer for their mother's home on Dec. 10, 2010, and then learned weeks later, in February, 2011, that the property had been listed again for sale, "presumably under the assignment clause known as a shadow flip."

In their lawsuit, the brothers allege the defendants ran a real estate scam in which buyers were pressured into selling their homes for less than the properties were worth and that more than 60 property owners were affected.

"None of the defendants advised the plaintiffs that the property would be immediately flipped for sale at a much higher purchase price," the lawsuit states.

The plaintiffs are seeking compensation equal to the difference between the transaction price of $870,000 and an unspecified profit made on the subsequent shadow flip. None of the allegations has been tested in court.

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Concerns about shadow flipping prompted the B.C. government in March to announce measures to crack down on the practice. The new rules require the seller to be informed and to receive any profits from a contract assignment.

Mr. Wu's current company, New Coast Realty, was placed under a series of restrictions in April following a Globe investigation that revealed he coached his agents on how to get a quick sale by lying to clients about how much their property was worth.

New Coast has denied allegations of wrongdoing and says it is co-operating with investigations by industry regulators.

The provincial government earlier this month took over regulation of the real estate industry, which had been self-regulated since 2006, after an independent advisory panel issued a report with 28 recommendations to overhaul industry oversight.

The panel stopped short of recommending the end of self-regulation, as that was outside of its mandate, but found that the public had lost faith in a system that appeared to leave consumers vulnerable to shady, predatory practices.

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