The real estate industry can be a lucrative investment ground. Unfortunately, it can also attract people looking to take advantage of others.
According to the Association of Certified Fraud Examiner’s 2012 Global Fraud Study, Report to the Nations on Occupational Fraud and Abuse, real estate industry fraud cases accounted for the second-largest median loss.
Common types of real estate fraud, the perpetrators of which can range from homebuyers, sellers, appraisers and lenders to developers and property owners, include:
Appraisal fraud: Appraisal fraud can occur when appraisers present unrealistic, inflated or deflated appraisals or when they aren’t actually at an arm’s length from the transaction. An appraisal fraudster may provide an accurate appraisal to the seller while providing the buyer an inflated or deflated appraisal. If you’re hiring an appraiser, carefully assess his or her experience, credentials and whether he or she is at an arm’s length. When you receive your appraisal, review all of the accompanying documentation.
Loan fraud: Real estate loan fraud is when a buyer either falsifies information to obtain a loan (mortgage fraud) or uses a stolen identity to reap the benefits or proceeds from the sale of a property (title fraud). If you spot any abnormalities with an offer, such as incongruous employment or salary information, offering items other than cash for a down payment or an odd relationship between the seller and buyer, consider investigating the buyer more closely or asking for verified proof of a claim.
Overpayment rental fraud: Overpayment rental fraud occurs when tenants use a counterfeit cheque and pay an amount greater than what they owe for their rent, requesting a reimbursement of the difference. Whenever you receive a rent cheque, review it carefully. If the payment is inflated, it’s possible you have received a counterfeit cheque. Take note of the name on the cheque, the financial institution and any endorsements – all of these may point to potential identity fraud. If tenants offer to pay up front for additional services, be cautious – they may “change their mind” and ask for a “refund,” without showing up to occupy the property.
Project development fraud: Project development fraud involves commingling funds or fraudulently directing funds to other projects. Most real estate projects have one partner who is more active than others. Without proper controls in place, this individual might be able to inflate expenses, misappropriate funds to other projects or hire a biased management company. Ensure your contract includes safeguards against this kind of activity and regularly review financial statements as the project progresses.
Real estate investment fraud: Real estate investment fraud encourages consumers to give money to a fraud promoter with the promise of a significant return. A good rule of thumb for any investment is if it seems too good to be true, it probably is. Do extensive research of the business or project you’re investing in, including a review of the prospectus, audited financial statements and the company’s principals. •
