How To Spot Real Estate Fraud
Real estate, like any field with the potential to be lucrative, carries with it the risk of fraud. As an investor, you want to stay vigilant because by this point, there’s enough information on how to avoid getting caught up in a fraudulent scheme that doing so could almost be considered an unforced error.
We’re fond of saying this, but it’s worth repeating: if it’s a plan to get rich quick with little or no work, it’s probably not real. If it seems too good to be true, then it probably is.
As with most things, success in real estate requires careful planning, discipline, organization, and an eye for the long game. Impulsiveness or failure to do one’s due diligence is a recipe for disaster. If you avoid these, and stay in the headspace of hard work yielding good results, you’re likely to avoid most fraud pitches and attempts.
That being said, here are some of the most common types of fraudulent or disadvantageous arrangements often pitched to aspiring real estate investors:
Straw Buyers
A straw buyer isn’t so much a conman but rather the role a conman prefers a would-be investor to play. A straw buyer is essentially a person who makes a purchase on behalf of another person, usually when the real buyer cannot complete the transaction for some reason. It is not necessarily illegal to use a straw buyer, except where the transaction involves fraud or purchasing goods for someone who is legally barred from making the purchase on their own.
Still, it’s not a good scheme for an investor to be involved in, because the only role you’re likely to play is the credible purchaser, and that involves a risk to your credit, especially when you have little control over the transaction and process.
This is because most of the time, a straw buyer is used when the real buyer has poor credit and is unable to obtain financing (which should obviously be an immediate, undeniable red flag). The real buyer promises to make all the payments and may compensate the straw buyer for the use of his or her credit, but as you can probably tell by this point, such an arrangement has the potential to go bad pretty quickly in multiple ways.
Banks aren’t fond of straw buyers because the arrangement increases the risk of default on the loan without the bank’s prior knowledge of that risk, and to be honest, who can blame them? That would be like agreeing to loan a credible friend money only to find out they were a front to get a loan for their unemployed, couch-surfing brother-in-law. You might not have loaned money to their brother-in-law, so would it be fair for your friend to mislead you like that?
If you take on the role of straw buyer for an unscrupulous buyer, your own credit may be put at risk because you may be held legally responsible for the debt they incurred on your behalf.
Fraudulent or poorly written rent-to-own agreements
We see so many poorly written or negotiated rent-to-own agreements that it’s worth bringing up in this piece, even though most professional investors won’t necessarily get caught up in one in their usual dealings.
Still, a renter who would like to own the home they’re living in is essentially an investor. Taking on a rent-to-own agreement can be a smart move for renters, but the conditions have to be right.
As far as outright fraudulent rent-to-own agreements go, it’s not unheard of for owners who are in financial trouble to pocket the lease payments of unsuspecting renters while leaving house in foreclosure. The worst part is that there’s little legal recourse for renters caught in that situation, especially as they deal with finding a new place to live when they discover the home has been served with a notice to vacate.
If you’re considering renting to own, always do a title check on the home to ensure the owner isn’t in default, and have an attorney stipulate this in your agreement.
More common are poorly written (or misunderstood) agreements that have incorrect language in the Lease Option, which is supposed to afford equitable interest to the tenant/buyer. In most situations, a percentage of your monthly rent payments should go towards the asking price of the home, which lowers said price at the end of the agreement.
Alternatively, some rent-to-own agreements are owner-finance agreements, in which the owner of the home accepts payments from the tenant over the course of a much longer agreement that’s closer in nature to a mortgage loan.
Whatever the case may be, as the buyer here you need to make sure the terms are clear and that you understand what you’re getting into. It’s wise to have an attorney go over your agreement and answer any questions you may have.
Wholesale pretenders vs. wholesale professionals
As an investor, wholesale real estate is a good resource for your business. The problem is that there are a disturbing number of market players who are wholesalers in name only.
While technically not illegal, wholesale pretenders can still be a huge headache, and they count on new investors having little experience. It’s not uncommon for wholesale pretenders to be in escrow to buy a property for half the amount they’re expecting to sell it for. These are not wholesale deals. Most of the time, they’re not even good retail deals.
The easiest way to avoid this is to not be fooled by gimmicky websites with flowery language promising you equity and/or profit.
And do your homework. Find out if the house you want buy is currently listed on your local MLS or has been recently. You can search the tax records to find out how much the seller paid for the property. If you do this, you’ll be able to quickly separate the professional wholesalers from the wholesale pretenders.
For more perspectives on finance and real estate investment, check back with us each week as we post new blogs and be sure to sign up for our Priority Access List for advance listings and market updates. We’ll see you next week, and in the meantime, don’t forget that you can also keep up with us on Facebook and Twitter!
- Get It Right Solutions