When I did my time in real estate, I came across a lot of potential fraud and shady dealings that the average buyer or seller might miss. And as mortgage fraud has become more and more popular in the news lately, I got to thinking about some of the mortgage fraud I saw -- and reported.
The thing you need to know about mortgage fraud is that even though it comes in a wide variety of flavors, all mortgage fraud shares one common denominator: it's all illegal and punishable by law. However, mortgage fraud is difficult to spot for the average buyer, making Caveat emptor (buyer beware) all the more important.
Surprisingly enough -- and contrary to what most people think -- the majority of mortgage fraud perpetrators were buyers I was working with. Many of them lied on mortgage applications, overstated income, falsified employment records, fabricated sources of down payments and would even lie about their intent to occupy the property as a homestead so that they could potentially qualify for optimal loans and rates.
Fraud for Profit
Fraud for profit, on the other hand, is an inside job I saw more than once. Usually, it was a conspiracy between appraisers, lenders and closing attorneys. And when it comes to fraud for profit, there are four kinds.
No. 1: Home Flipping
Home flipping is not when a seller legitimately improves a property and resells it. When flipping becomes illegal is when sellers or investors lie about improvements to inflate the price of the property.
How to avoid this? Use a skilled buyer's agent and get an independent third party inspection of any property you are considering.
No. 2: Straw buyers
Straw buyers are front men. During this type of fraud, someone who has poor credit dupes an unsuspecting victim into believing that they are investing in real estate that will be rented out (usually to them), and then the buyer tells the seller that they will receive rental payments to cover the mortgage. The only problem is that no payments are ever made to the actual buyer, leaving them in the financial lurch -- and I have seen this end in foreclosure more than a few times.
How to avoid this? Beware any deal that seems too good to be true, and avoid doing any real estate investment transactions with anyone other than a legitimate partner.
No. 3: Appraisal fraud
Appraisal fraud is usually a second fiddle mortgage fraud, but an important element nonetheless. Here, appraisers inflate property values to justify a sales price, upping the profit for an unscrupulous investor. Dishonest appraisers will inflate the value of a property in exchange for a cut of the proceeds from the sale after market. I have seen this leave more than a few buyers underwater as well.
How to avoid this? Have your real estate agent pull comparable properties on any home you want to make an offer on. Good agents will be able to give a recommendation on how much a home is worth, since their training is quite similar to the training appraisers receive.
No. 4: Foreclosure scams
Since I was a distressed home specialist, I saw this scam over and over again. A con artist would tell a buyer that they could help them stop their foreclosure, but they needed money upfront to do it. Once the homeowner forks over the cash, the con artist disappears.
How to avoid this? Only work with a certified real estate professional and do your research on whomever you hire, as well as their company with the Better Business Bureau.
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