Real Estate Investing Fraud: Schemes to Know About 

Investing in real estate can be both a satisfying and lucrative way of building your portfolio. However, the complexity of buying and owning property can make you vulnerable to some unscrupulous characters.

From corrupt builders to phony appraisers, the real estate market can be tricky to navigate for investors of all experience levels. Unlike the typical tax scam or trustee fraud, real estate investment schemes can lure in even the savviest investor with promises of making a lot of money quickly with low risk. Many fraudsters are so good at what they do that it takes a careful eye to see them for what they really are.

Here are 13 real estate investing scams you should know about.

Buy and Bail

In this scam, the homeowner is up-to-date on their mortgage payments, but the home’s value has dropped below the amount owed on the loan. The homeowner applies for a mortgage on a similar home with a much lower price. After falsely saying that the first home will be rented out and securing the new loan, the homeowner allows the first home to go into foreclosure.

Builder Bailout

The builder artificially boosts the purchase price of newly constructed properties by offering false down payment assistance or by using straw buyers or shell affiliates. This scheme creates the impression that the builder is able to successfully sell units while also leaving the lender with loan exposure that exceeds the actual value of the property.

Chunking

Also known as a Ponzi scheme, this scam occurs when a third party convinces an investor to buy the property or a group of properties at artificially inflated prices with the promise of high returns and low risks. The third party, who is often an owner of the property, acts as the unsuspecting investor's agent.

joker cardDouble Selling

In this scheme, an unethical loan officer copies a borrower’s loan application and sends it to several different lenders, asking that they fund the loan. All of the closings are scheduled within a few days of each other, and the various lenders have competing loans against the same property.

Fake Loan

A mortgage broker uses a real person’s identity to create a phony loan application. The loan is funded, and the “seller” receives payment for a property that does not exist.

Flipping

This fraud occurs when two parties buy and sell the same property to one another and then obtain fraudulent appraisals as a way to inflate the property value.

Phony Appraisal

There are a few ways to accomplish this scheme. One way is to offer an appraiser a bribe to artificially inflate a property’s appraised value. A related scam involves a real estate investor providing the appraiser with falsified vacancy rates, rental rates, or expenses for a property.

Skimming

Here’s the scenario for a skimming scam. An investor uses a loan that covers 80% to 90% of a home’s purchase price. Then the investor pays a 10% down payment and rents the properties but does not make mortgage payments.

Modification and Refinance Fraud

A borrower understates income or gives false primary residence information in order to persuade the lender to accept loan terms that benefit the borrower.

Mortgage Servicing Fraud

This scheme involves a mortgage servicing company diverting principal, interest, or escrow funds from the underlying lender and retaining the funds for its own use.

Phantom Sale

A scammer files a false deed on an abandoned property and then transfers the property to another scammer. That scammer applies for a mortgage loan and pockets the loan proceeds.

Reverse Mortgage Fraud

In this scheme, a fraudulent person obtains title to a property and then deeds it to a fake individual who qualifies for a reverse mortgage. Then the fraudster gets the lump sum payment option on the reverse mortgage.

Short Sale Fraud

Short sale fraud can be conducted by either the homeowner, the lending institution, or an outside party. Generally, short sale fraud involves withholding facts or using false information to defraud the lender or induce a homeowner to sell a property for less than the mortgage debt owed.

How To Fight Real Estate Investing Fraud

How can you avoid these and other real estate investment frauds? Here are some key steps to stay safe.

  • Get the terms in writing. Assume nothing is concrete until it is in a signed written document.
  • Trust your instincts. If something sounds too good to be true, it probably is.
  • Ask questions. Be willing to walk away if your questions are not answered to your satisfaction. If the deal seems to favor you, find out what the other party is getting. A good real estate transaction benefits both parties.
  • Monitor your credit scores and accounts. Fraudsters may use your personal information to open accounts in your name. You are entitled to one free credit report per year from each of the major credit bureaus.
  • Know the value of the property and stay within your budget. Fraudsters will try to convince you to spend too much or sell for too little so that they can keep the difference.
  • Seek professional advice. Ask an experienced real estate attorney to review any contracts before you sign.

Solid real estate investments take time and careful consideration. Before you make an investment, do your due diligence and consult someone you trust and who you know has your best interests in mind.

Image by Alexas_Fotos from Pixabay

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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