How to Protect Yourself from Real Estate Fraud
There is no question that the rapid technological growth taking place within the real estate industry has streamlined the process of buying and selling a home. However, it’s important to note that these changes have also created space for new, fraudulent schemes designed to take advantage of unsuspecting buyers and sellers. Taking a few minutes to understand the most frequently perpetrated threats can mean the difference between a smooth transaction and one fraught with risk and potential losses.
Short Sale Fraud
What is it:
Short sale fraud involves two fraudulent actors - a property owner and his/her co-conspirator. The co-conspirator is brought on to make a lower offer to the short sale lender. Typically, the offer is presented along with a manipulated valuation that is much lower than the actual valuation of the property. Once the short sale lender accepts the lower valuation, the fraudster will market and sell the house using a legitimate valuation, while pocketing the difference as profit.
If you are a seller or a lender, you can avoid short sale fraud by ensuring that whoever is completing the Broker Price Opinion (BPO) never uses comparable properties offered by someone involved in the short sale. They should only be using material facts about the property, and they should be wary of houses that are staged to appear to need extensive repair - fraudsters will often use inflated repair costs to drive the valuation down.
Mortgage Loan Fraud
What is it:
An ever-increasing issue within the US real estate industry, mortgage fraud encompasses several different types of crimes. These include: intentionally including misleading and/or false statements on documents related to the mortgage process, failing to disclose pertinent information to the mortgage lender, filling out documents using a fake name, or intentionally misrepresenting one’s annual income.
To insulate yourself from the dangerous risks associated with mortgage loan fraud, it is essential that both the investors and home-buyers set realistic expectations for borrowing and for profit. This means being mindful of asset falsification, predatory lending practices, and property flipping schemes, which are only illegal if they involve false statements to the lender. Many states have begun requiring loan officer licensing, but as a buyer, it is still important to both check for up-to-date local and state licensing, as well as to find qualified mortgage professionals through vetted referrals. Finally, always make sure you that you understand exactly what each document you sign is saying, or find someone you trust who can explain it to you. Knowledge is the best way to protect yourself against fraudulent mortgage practices.
What is it:
Title fraud refers to any incidence of fraudulent activity or forgery involving the home title. Typically, it involves the use of a false identity to transfer ownership of a property to a fraudulent actor, who then uses those credentials to lock down as many loans as he or she can without getting caught. The elderly are disproportionately exposed to title fraud, in part because they have significant amounts of equity in their homes and also may not be cognizant of items like missing property tax bills. These same details are often overlooked by owners of vacation homes and investment properties, making them another frequent target of title fraudsters. Per occurrence, title fraud averages about $103,000 worth of losses.
Typically, the most reliable way to avoid incidences of title fraud is by purchasing title insurance. Title insurance will remove any liability on the part of the true homeowner should some type of scheme be attempted. It can also protect against clerical errors and inaccurate information by placing responsibility into the hands of the title company itself.
What is it:
Wire fraud schemes involve the use of false pretenses to deceive victims into forfeiting assets via wire transfer or communication. The most ubiquitous form of wire fraud is the fraudulent request for a deposit on a home.
In order to prevent wire fraud, it’s important to protect your personal information at each and every step of the homebuying process. In particular, many individuals fall victim to wire fraud as a result of communicating sensitive personal or financial information via email, to addresses that may be illegitimate. Double-checking the preferred method of communication for each of your service providers and changing your passwords and usernames on a monthly basis can help stonewall potential attackers, as can the use of antivirus and firewall programs on your computer. Additionally, home buyers should always report fraudulent activity to the Internet Crime Complaint Center in order to help prevent future attacks.
The Bottom Line:
The real estate industry is changing, that much is clear. The entire process of buying and selling a home is being streamlined to create a better experience for the consumer. Arming yourself with the most accurate knowledge and practices for avoiding fraud is the best way to reap the benefits of this technological revolution while avoiding its pitfalls.
Note: Thank you to Redfin for assisting with this article.