Real Estate Fraud

What is Real Estate Fraud?

Real estate fraud refers to any intentional misrepresentation or deception made in connection with a real estate transaction. The goal of the person committing fraud is to gain a financial advantage or property illegally. This can involve lying about facts, hiding important information, or manipulating documents to trick someone into making a decision they wouldn't otherwise make. Victims of real estate fraud can include individual homebuyers, sellers, lenders, investors, and even government agencies. It's a serious crime that can lead to significant financial losses and legal consequences for those involved.

Common Types of Real Estate Fraud

Fraud in real estate can take many forms, often adapting to current market conditions. Understanding the most common types can help you identify and avoid them.

Mortgage Fraud

This occurs when someone provides false information to get a mortgage loan or to get a larger loan than they qualify for. Examples include using fake income documents, lying about employment, or using a "straw buyer" (someone who buys a property on behalf of another person who cannot qualify for a loan). Inflated appraisals, where a property's value is deliberately overstated, are also a common tactic in mortgage fraud.

Foreclosure Rescue Scams

These scams target homeowners who are struggling to make their mortgage payments and are at risk of foreclosure. Scammers often promise to help save the home but instead trick the homeowner into signing over the deed, paying excessive fees for services never rendered, or entering into confusing loan agreements that worsen their situation.

Investment Scams

Fraudulent investment schemes promise high returns with little to no risk in real estate. These can include Ponzi schemes disguised as real estate development projects, where early investors are paid with money from new investors, or schemes involving properties that don't exist or are grossly misrepresented. These often target new investors eager to enter the market.

Deed Fraud

Deed fraud involves illegally transferring property ownership without the true owner's knowledge or consent. This can happen through forged signatures on property deeds or by tricking vulnerable individuals into signing documents that transfer their property. Once the deed is transferred, the fraudster might try to sell the property or take out a new mortgage against it.

How to Protect Yourself from Real Estate Fraud

Being aware and taking proactive steps are your best defenses against real estate fraud. Always approach transactions with caution and verify information independently.

Key Protective Measures

• Conduct Due Diligence: Thoroughly research any property, company, or individual involved in a transaction. Verify licenses, check reviews, and look for public records.
• Work with Trusted Professionals: Use licensed real estate agents, attorneys, and reputable lenders. Never rely solely on recommendations from the other party in a transaction.
• Review All Documents Carefully: Read every document before signing. If you don't understand something, ask for clarification or consult with your attorney.
• Secure Your Personal Information: Be cautious about sharing sensitive financial or personal data. Use secure channels for communication and document exchange.
• Obtain Title Insurance: This protects you and your lender from financial loss due to defects in a property's title, including those caused by deed fraud.

Red Flags to Watch For

• Unusually Good Deals: If an offer seems too good to be true, it probably is. Be wary of properties priced significantly below market value.
• Pressure to Act Quickly: Scammers often create a sense of urgency to prevent you from doing proper research or seeking advice.
• Requests for Cash Payments: Be suspicious of requests for large cash payments, especially outside of standard escrow procedures.
• Unlicensed or Unverified Professionals: Always confirm that real estate agents, brokers, and lenders are properly licensed and in good standing.
• Vague or Inconsistent Information: Pay attention if details about the property, seller, or transaction are unclear, change frequently, or don't add up.

Real-World Example of Mortgage Fraud

Imagine a fraudster, let's call him Mark, wants to buy a property for $300,000 but doesn't qualify for a loan. He finds a friend, Sarah, who has good credit but no intention of living in the property. Mark convinces Sarah to apply for a mortgage, promising to make all the payments. Sarah agrees and submits a loan application stating she will occupy the property as her primary residence, which is a lie, and inflates her income slightly to meet the lender's requirements. The property's appraisal is also manipulated to show a value of $350,000, allowing Mark to get a larger loan than the actual purchase price.

Here's how the fraud unfolds:

1. Sarah applies for a mortgage of $280,000 (80% of the inflated $350,000 value) for a property actually worth $300,000.
2. She falsely states her intention to live in the property and provides slightly inflated income figures.
3. The lender approves the loan based on the false information and inflated appraisal.
4. At closing, the $280,000 loan is disbursed. Since the actual purchase price was $300,000, Mark only needed $240,000 (80% of $300,000) for the loan. The extra $40,000 from the inflated loan amount is then illegally diverted to Mark or other conspirators.
5. Mark initially makes a few payments, but eventually stops, leaving Sarah responsible for a mortgage on a property she doesn't live in and a lender with a loan based on fraudulent information.

This example highlights how multiple deceptive acts—false statements on a loan application, inflated appraisal, and straw buyer scheme—combine to commit mortgage fraud, harming both the lender and the unsuspecting (or complicit) straw buyer.