Preventing real estate fraud is a
major challenge that most real estate sales professionals, and even lenders for
that matter, encounter. Real estate fraud presents itself in many forms – some
more common than others.
Title fraud: Though this doesn’t
happen often, it is a costly form of fraud that one hopes they are protected
against with their title insurance. As a real estate sales professional, do you
want to be associated with the origination where title fraud is present on a
deal? Absolutely not. The best ways to combat title fraud are to meet the
borrowers, request identification, independently verify who is on title to the
home and ask them questions about the home, sales history, even things in the
area that may help you identify if something seems a bit off!
Value fraud: in a recent
publication, the Law Society of BC had an excellent example of this type of
fraud that we thought it would be prudent to share.
“Value fraud
in this situation, back-to-back purchases of the same property are arranged
from a legitimate vendor. The first purchase is for the arranged sale price —
say $300,000. Then a subsequent (fraudulent) deal (from one fraudster to
another) is arranged (i.e., a “flip”) for $400,000. Both purchases are set to
close on the same day. The fraudster arranges for a high-ratio mortgage on the
basis of the second deal. The high-ratio mortgage funds are used to close the
real estate deals, since the amount of the mortgage (95% of $400,000 =
$380,000) is enough to cover the deals. The fraudsters are counting on the
financial institutions not doing their full due diligence or having an on-site
appraisal done of the property to verify the stated property value. Sooner or
later, the balance of the mortgage funds and the fraudster disappear, leaving
the bank holding a mortgage for far more than the property is worth.”
“A second value
fraud occurs when a legitimate agreement of purchase and sale is entered into
between a vendor and the fraudster, say for $350,000. The vendor and the
fraudster then sign a one-page amendment that provides a credit of $50,000
against the purchase price (stated to be for repairs). The fraudster does not
disclose this credit in obtaining high-ratio financing. The deal closes and the
mortgage payments stop shortly thereafter. The fraudster disappears with the
balance of the financing leaving the bank with a mortgage greater than the
value of the property.”
Check out the
full article here: https://www.lawsociety.bc.ca/page.cfm?cid=1347&t=Practice-Tips:-Fighting-back-against-fraud-%E2%80%94-the-risks-in-real-estate.
Here are some red flags that
can help you to suss out a real estate fraudster:
·
A client is making a
large property purchase with cash and cannot evidence this from the sale of
another property.
·
The client has
documents to confirm the property transfer but not the original purchase and
sale agreement.
·
The property’s sales
history is showing multiple recent purchases – each showing the value
increasing.
·
The client doesn’t
want to provide identification, or will, but doesn’t want you to make a copy of
it.
·
The seller indicates
that there was a deposit made that was not recorded on the purchase and sale
agreement – with payment being made directly to the seller and not through you.
·
The client wants the
transaction closed very quickly.
·
The client wants you
to indicate a higher purchase price on the agreement than the actual purchase
price.
·
The sale price is
unreasonably greater than that of other homes in the area.
·
The title shows a
history of mortgages being registered and then discharged in short time spans.
Above is just
a short list of behaviours that can occur that can mean fraud. Your ears might
be ringing but here come the words again: due diligence saves the day, most of
the time. Think of water, forcefully flowing from the tap as your deals, now
think of the spatter that escapes the stream as representing these instances
when something on a deal is off. Maybe in these cases it is better to dig a
little deeper and perhaps pass on a deal rather than getting caught in the
middle of a fraud scheme that can not only get you in trouble, but also put
your relationships with your partners at risk.
For more
information about tools you can use to identify real estate fraud please visit www.geowarehouse.ca.
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