6 Ways to Avoid Property Fraud – Part 1
Real estate acquisition, whether for personal use or investing is generally considered a safe investment when negotiated well, considering satisfactory due diligence and a good purchase price. However, it is also an area for fraudsters and con artists who prey on unsuspecting investors.
It is not uncommon for both the rookie and veteran investor to be distracted by the “shiny object” dilemma. Chasing the easy money can be an obsession many investors inadvertently become trapped by. When you are in this mindset, those “too good to be true” kind of deals can seem very enticing and may contain lofty promises which are ultimately unfulfillable or cleverly commandeer particular obligations from you without your knowledge.
As the ever expanding usage of online technologies continues to grow, the incidence of fraudulent activity affecting real estate entrepreneurs is on the rise, predominately in the tenant acquisition and the buying and selling of real estate.
Recently the protocol for the mortgage industry has made it tougher for people to mortgage qualify. This protocol as well as a typical lender’s geographical rick tolerance has made it more challenging for those “Oklahoma” type deals to happen. That said, even with provincial regulators tracking mortgage and title fraud regularly, it still hits around $300 million a year in Canada.
The following outline some standard types of real estate fraud as well as how to distinguish and avoid these situations .
Real estate frauds to beware of:
1. Title fraud
The most common type of fraud for shelter is title fraud, in which someone fraudulently obtains title to a property for their own purposes. Awareness of this type of fraud is elevated by title insurance brokers, who have a vested interest in promoting awareness of this kind of real estate fraud. The insurers stand to lose money if a claim is made, so it’s in their interest to sell title insurance as protection. Some provinces and most lenders accept title insurance in place of obtaining verification of clear title in a transaction, however, this can potentially defer resolution of issues until a problem becomes apparent.
Risks to clear title include a fraudster securing access to a property using fake identification and a forged signature. This has been a particular risk in the past where a common combination of first and last names is used to obtain title to properties without arousing suspicion. One notable case in B.C. saw a dozen properties accumulated by the fraudster before the scam was stopped.
Such properties are either resold for the proceeds, or used as security to tap a mortgage for the value of the property. Tips that such a fraud is occurring may include the failure of tax assessments and other notices associated with the property to arrive, or the discovery of a second mortgage on the property.
To reduce the risk of becoming the victim of such a scam, the Better Business Bureau recommends property owners take steps to avoid identity theft, including the secure storage of all personal information and the shredding of such documents when they’re no longer needed.
2. Tenants on title
It’s not just property owners that can be subject to fraud for shelter. Unscrupulous tenants can also con landlords, and vice versa. The Better Business Bureau recommends that landlords verify the identities of all prospective renters and to check properties regularly to protect themselves against “Trojan” tenants that can gain a landlord’s confidence only to perpetrate a scam.
Similarly, tenants should ensure that their own personal information is not being mined to saddle them with payments on a property they only intended to rent.
The scam typically involves a real estate agent working in conjunction with a mortgage broker who is actively searching for individuals for use as straw buyers. The individuals, either knowingly or unknowingly are placed on title.
The mortgage broker provides the down payment through a subsidiary company and arranges for false documents that place the straw buyer on title. One search of one mortgage broker’s files in British Columbia found just one legitimate title in 50. The rest were either victims of identity theft or tenants who didn’t realize they were on title for the properties they were occupying.
3. Home equity scams
Cash-crunched property owners are particularly vulnerable to pitches that offer to reduce debt loads or tap property equity to consolidate debts. While there are legitimate means of tapping property equity, the Better Business Bureau warns investors against offers that invite owners to embellish their application by exaggerating income or down payment sources in order to secure a larger loan. This does the fraudster’s dirty work for them, and leaves the unfortunate investor on the hook.
Common come-on lines include “We’ll save your credit” or “We will get you a new mortgage with low monthly payments,” but may come at the cost of title through a “quit claim deed” not to mention finances. While savvy real estate investors may steer clear of such risks, the Better Business Bureau notes that fraudsters have many sophisticated ways of luring novices into signing documentation that could harm them financially.
Contracts that truly reduce one’s liabilities or restructure one’s debts should include clauses formally releasing the property owner from past obligations and the assumption of new obligations, otherwise the owner might be on the hook for both.