Tag Archives: conflict of interest

Real Estate Scams to Avoid

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Scam Detector quoted me in 10 Real Estate Scams That You Need To Avoid Today. It opens,

The real estate industry is a sector that’s extremely profitable if done right. If you think about it, a house is the most expensive item that a person buys over his/her lifetime. Big money, big opportunities. However, on the same token criminals prey on the weak and use creative ways to make a lot of money by scamming victims all over the world, whether buyers, sellers or realtors.

Amongst the most notorious fraudulent practices on the market, we have already exposed and shared information about real estate investment scams, home buying scams, residential real estate tips and the Real Estate Agent Scam.

This week we caught up with a few fraud prevention experts and real estate professionals. We invited them to share new tips and expose some prevalent scams they’re aware of, which are happening now.

Here are 10 real estate scams that you need to avoid today:

1. Hackers Stealing Your Down Payment: Mortgage Closing Date

“A hacker could fool you into thinking he’s your agent and trick you into sending him money, which you’ll never get back. It’s so bad the FTC even sent an alert warning consumers that real estate agents email accounts are getting hacked.”, says Robert Siciliano, fraud prevention expert with IDTheftSecurity.com.

He continues: “Let’s say your realtor’s name is Bill Baker. Bill Baker’s e-mail account gets hacked. The hacker observes Baker’s correspondences with his clients—including you. Ahhh, the hacker sees you have an upcoming closing. The hacker, posing as Bill Baker, sends you an e-mail, complete with  instructions on where to wire your closing funds. You follow these instructions. But there’s one last step: kissing your money goodbye, as it will disappear into an untraceable abyss overseas. This scam can also target your escrow agent.”

“It’s obvious that one way to prevent this is to arrange a home purchase  deal where there are zero closing costs”, says Siciliano. “The scam is prevalent, perhaps having occurred thousands of times. It was just a matter of time until scammers recognized the opportunity to target real estate agents and their clients.

The lax security defences of the real estate industry haven’t helped. Unlike the entire financial industry who have encrypted communications, the real estate industry is a hodgepodge of free e-mail accounts and unprotected communications.”

In addition, Robert points out: “Realtors, who are so often on the go and in a hurry, frequently use public Wi-Fi like at coffee houses. Anyone involved in a real estate transaction can be hacked, such as lawyers”.

When it comes to preventing this particular scam, here are a few points that Siciliano suggests:

– Eliminate e-mail as a correspondence conduit—at least as far as information on closings and other sensitive information.

– On the other hand, you may value having “everything in writing,” and e-mail provides a permanent record. In that case, use encrypted email or  some setup that requires additional login credentials to gain access to the  communication.

– For money-wiring instructions, request a phone call. And make this  request over the phone so that the hacker doesn’t try to pose as your Realtor over the phone.

– Any e-mailed money instructions should be confirmed by phone—with the Realtor and the bank to send the money to.

– Get verification of the transfer ASAP. If you suspect a scam, have the  receiving bank freeze any withdrawal attempt of the newly deposited  funds—if you’ve reached the bank in time, that is.

2. Real Estate Agents Assigning The Sales To Themselves

“I know a victim of a realtor who is scamming his buyers by taking advantage of sudden traumatic life events”, says Mariko Baerg from Bridgewell Group.

A buyer had purchased a house. Between the time it was a firm deal and the title transfer date he got in a severe car accident and could no longer work for the short term.

The realtor that was representing him had coerced the buyer into assigning the sale to the realtor himself for a discounted price because he fearfully convinced the buyer that he would have difficulties keeping his financing from the lender.

Assigning to yourself is a clear conflict of interest, the realtor did not try to market the assignment to anyone else, and the sale amount was $100,000 less than market value! He also forged the seller’s signature to convince the buyer that it was OK to assign the property.

The issue could be avoided by making sure you have a power of attorney lined up in the case that you have an accident, making your realtor show you comparables to confirm what market value is before transferring. Also, if you have a feeling there may be a conflict of interest always obtain legal counsel or receive a second opinion to determine what your options are.”, explains Berg.

3. Arc Fault Breaker Swap Out Scam

This next fraudulent practice is exposed by Jeff Miller, co-founder of AE Home Group: “Arc fault breaker swap outs are a common scam I’ve seen in the flipping industry. Modern building code requires that electrical boxes contain arc fault breakers as opposed to traditional breakers in order to further prevent electrical fires.

While safer, these arc fault breakers can add upwards of $800 to the cost of the renovation. Following the issuance of a use and occupancy permit, some flippers will return to the home and replace these expensive arc fault breakers with the cheaper traditional breakers, adding profit to their bottom line.”, says Miller.

4. Real Estate News: Bait and Switch Scheme

Another fraudulent real estate practice is the “bait and switch” scheme, explained here by Lucas Machado, President of House Heroes: “The scam occurs when a prospective buyer offers an “above market value” price to a home seller. The seller – blown away by the high offer – excitedly signs on the dotted line.

Sadly, the unscrupulous buyer has no intention to purchase the property at this price.

Once the seller signs the contract, the seller may only sell to that buyer for a specified time (weeks to even months) for the buyer’s purported due diligence. When that time ends, the fraudster asks to extend the contract a few weeks to work out closing details. Sounding reasonable, the seller agrees to the extension blinded by the high offer.”, warns Machado.

“There are two impacts on the seller. The seller keeps paying taxes, maintenance, utilities, insurance and develops an emotional commitment to sell.

Here’s what happens in the bait and switch: the buyer comes back to the seller with an excuse as to why this price no longer works, requests  a reduction to below market value, and threatens to cancel if their demand  is not met. Stressed by passage of time and on-going costs, the frustrated  seller agrees to the reduction.”

Machado offers a concrete example: “Our company had a scenario where we offered $185,000. The seller accepted a $220,000 offer. The “buyer” asked for extension after extension, for 12 months, and then the tired seller agreed to sale price $180,000. The victimized seller had on-going costs around $10,000 and lost approximately $20,000 by not accepting our offer a year ago.”

How can you avoid the bait and switch scheme?

a. Confirm proof of funds at time of executing the contract.

b. Do not grant unreasonable extensions or reductions.

c. Set expectations early on.

d. If extension or reduction is based on condition, request an inspector or general contractor report verifying claims.

5. Duplicated Listings

Leah Slaughter with OmniKey Realty warns about a scam constantly happening in the real estate business: the Duplicated Listings.

“We often see companies copy our legitimate rental listings and post on Craigslist for a much cheaper price. Unfortunately, many people fall for  these fake listings and wire or overnight money to the owners of these fake  listings and then cannot get access and eventually locate us and all we can  do is refer them to the police.”, says Slaughter.

“When searching for a rental, do your research and make sure you are working with a reputable company or a licensed agent/broker. If a landlord says they are not local and cannot give you access to the property, that is an immediate red flag.”

6. Real Estate Lawyers: Fake Profiles

David Reiss from Brooklyn Law School warns about a new type of scam: impersonating real estate lawyers. “In this case, the scammer takes control of the proceeds of a real estate closing by impersonating one of the parties to the closing and redirecting proceeds to an account controlled by him/her. The criminal might impersonate the seller’s lawyer and instruct that the proceeds from the sale be redirected to a new account.”, says Reiss.

“All such changes should be confirmed by a phone call (to a number that you know to be valid!) to confirm that they are from the real seller.”

Kushner Conflicts with Fannie & Freddie

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photo by Lori Berkowitz

Jared Kushner, Senior Advisor to President Trump

Bloomberg quoted me in Kushner’s Use of U.S.-Backed Apartment Loans Poses Conflict Risk. It opens, 

Jared Kushner relinquished control of his family’s multibillion-dollar real-estate business in January to eliminate conflicts of interest when he became a top White House adviser to his father-in-law, President Donald Trump.

Yet Kushner Cos. has apartment buildings from New Jersey to Maryland with more than $500 million in government-backed mortgages financed by Fannie Mae and Freddie Mac. That could put officials at those agencies in an awkward spot: If Kushner Cos. applies for a new loan, or wants to refinance, would Freddie turn them down? If Kushner Cos. fails to comply with the terms of a loan, will Fannie seek to foreclose on a property owned by the president’s in-laws?

“It clearly represents a conflict-of-interest because the government or the president can take actions that would benefit his family,” said David Reiss, a professor at Brooklyn Law School who has written about issues related to Fannie and Freddie.

Hope Hicks, a White House spokeswoman, said Kushner would comply with applicable ethics rules and would recuse himself from any discussions about overhauling Fannie and Freddie, which lawmakers have sought to do in recent years. Jamie Gorelick, an attorney who has represented Jared Kushner, didn’t respond to a request for comment.

Kushner Cos. says Jared’s White House position won’t have any effect on the family business. “The election has not changed Kushner Companies’ relationship with Fannie Mae and Freddie Mac,” said Kushner Cos. spokesman James Yolles. “And we will respond to policy changes like any other private company in the marketplace.”

The federal government took over Fannie and Freddie in 2008, amid the financial crisis, putting them under the control of the Federal Housing Finance Agency, an independent regulator.

The Cost of Selling Trump’s Empire

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photo by KylaBorgPolitico quoted me in Selling His Empire Would Cost Trump Money. A Lot of It. It opens,

Donald Trump’s critics say the only way for him to keep his business interests separate from the public’s interest is to simply get out of business entirely, selling his companies and putting the proceeds into anonymous assets that someone else can manage.

But there’s nothing simple about it: unloading a real estate empire as large as Trump’s is a lengthy, complicated process fraught with ethical pitfalls, one that could end up costing a fortune.

“He has to make a choice,” said David Reiss, director of Brooklyn Law’s Center for Urban Business Entrepreneurship. “How much pain is he willing to take?”

Trump, who’s expected to lay out a plan to address conflicts of interest at a press conference Wednesday, heads a particularly difficult estate to unwind. Forbes has pegged his net worth at $3.7 billion in September, attributing most of that to real property holdings tangled in debt, partnership agreements, management contracts, branding deals and tax deferrals.

Ethics watchdogs say Trump’s cleanest break would be to sell his company to the public, but an initial public offering — especially one that folds in most or all of Trump’s scattered businesses — would be complicated, costly and time-consuming.

“The nature of the business doesn’t lend itself to going public,” said Jan Baran, co-chair of Wiley Rein’s election law and government ethics practice. “Rolling in all the real estate and the royalty contracts and all the other orphans like wineries and steaks, it’s a little hard to imagine any public companies that resemble what his business is, because it’s such a hodgepodge of things. It would take a while, it would take at least a year.”

What’s more, Baran noted, an IPO would require underwriters to raise capital and pull together an offering — raising new concerns about investment firms potentially currying favor with the new administration.

“Are the ethics complainers willing to let Goldman Sachs do the underwriting on this public offering?” he said. “Somebody’s got to put it together.”

Even if Trump chose to skip the IPO and just liquidate his assets via direct sales, he’d face a complex task — and a costly one.

“This would be an extraordinarily difficult situation,” said Neil Shapiro, a law partner at Herrick Feinstein in New York. “It would certainly be unprecedented in terms of somebody liquidating a portfolio of this size. We’re in uncharted territories here.”

The problems start with finding a buyer. The pool of people shopping for, say, a Fifth Avenue skyscraper is small, and only the buyer and seller can say for sure whether the price paid is fair. As such, selling a property raises nearly as many ethical quandaries for Trump as owning it. A buyer looking to curry favor with the next president might pay too much. Another might do Trump a favor by making a quick deal while paying too little.

Dual Agency Explained

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photo by Richard P J Lambert

Trulia quoted me in What Is Dual Agency? (And Why You Should Beware). It opens,

Home sellers and homebuyers are two sides of a complementary transaction. Should they each have their own agent, or is one agent enough? The answer: It depends.

You’ve probably heard the phrase “You can’t have your cake and eat it too.” But if you’ve ever puzzled over it’s meaning, here’s a hint: If you eat your cake now, you won’t have any left over to look forward to eating later. In other words, sometimes a person is forced to make a choice between two good options. In the real estate world, dual agency breaks the cake rule: If your real estate agent also represents the sellers of the home you want to buy, you don’t necessarily need to ditch them. In many cases, you can keep your agent and get the house too — if you want to, that is.

Whether you’re buying a home in Providence, RI, or Tampa, FL, it’s typical for one agent to represent the seller and another agent to represent the buyer. With dual agency, one agent works for both the buyer and seller — and keeps the full commission. Dual agency also occurs when agents from the same brokerage represent each party. But like enjoying a huge slice of cake and in return getting a bellyache, there are definitely pros and cons to agreeing to dual agency.

Pro: Streamlined communication

Because one real estate agent or brokerage represents the buyer and the seller, the agent doesn’t need to wait every time communication needs to happen between the parties. Streamlined communication often creates a smoother transaction. “You are in charge of both sides, including paperwork, scheduling, and deadlines,” says Mindy Jensen, a Colorado agent and community manager of BiggerPockets.com. “We’ve all been involved in a sale with an agent who didn’t respond in a timely manner, missed deadlines, and in general did not perform their duties as they should have. For us control freaks, dual agency can seem like a great thing.”

Con: No advice

Because a dual agent is working in a potential conflict-of-interest situation — one client (the seller) wants to get as high a price as possible, while the other client (the buyer) wants to pay as little as possible — the agent can’t take sides or give advice. Bruce Ailion, an Atlanta, GA, real estate agent and attorney, compares dual agency to having one attorney representing both husband and wife in a divorce. “The parties’ interests are adverse and are best represented by independent professionals,” he says.

The agent in a dual agency situation becomes, instead of a coach, more of a referee. “The agent cannot disclose confidential information to either party and has to act in a neutral position during the transaction,” says Emily Matles, a New York, NY, agent with Douglas Elliman. Matthew Berger, another New York, NY, agent with Douglas Elliman, says: “When the listing agent steps into the role of dual agent, they cannot give advice to the seller nor the buyer.” On the other hand, when you have an independent agent, “You are more likely to get the benefits of being a principal getting fiduciary benefits,” Ailion says.

Pro: There must be full disclosure

Whether you’re a seller or a buyer, there’s nothing to fear about dual agency: If you don’t consent to the practice, it won’t happen. “The dual-agent broker must ensure that both parties know of the arrangement and consent to it,” says David Reiss, professor of law at Brooklyn Law School. His advice: “Home sellers should review the terms of the listing agreement before they sign it to see if dual agency is being contemplated.”

SEC Update on Rating Agency Industry

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The staff of the U.S. Securities and Exchange Commission has issued its Annual Report on Nationally Recognized Statistical Rating Organizations. The report documents some significant problems with the rating agency industry as it is currently structured. The report highlights competition, transparency and conflicts of interest as three important areas of concern.

Competition. There are some of the interesting insights to be culled from the report. It notes that “some of the smaller NRSROs [Nationally Recognized Statistical Rating Organizations] had built significant market share in the asset-backed securities rating category.” (16) That being said, the report also finds that despite “the notable progress made by smaller NRSROs in gaining market share in some of the ratings classes . . . , economic and regulatory barriers to entry continue to exist in the credit ratings industry, making it difficult for the smaller NRSROs to compete with the larger NRSROs.” (21)

Transparency. The report also notes that “there is a trend of NRSROs issuing unsolicited commentaries on solicited ratings issued by other NRSROs, which has increased the level of transparency within the credit ratings industry. The commentaries highlight differences in opinions and ratings criteria among rating agencies regarding certain structured finance transactions, concerning matters such as the sufficiency of the credit enhancement for the transactions. Such commentaries can serve to enhance investors’ understanding of the ratings criteria and differences in ratings approaches used by the different NRSROs.” (23) The report acknowledges that this is no cure-all for what ails the rating industry, it is a positive development.

Conflicts of Interest.Conflicts of interest have been central to the problems in the ratings industry, and were one of the factors that led to the subprime bubble and then bust of the 2000s.  The report notes that the “potential for conflicts of interest involving an NRSRO may continue to be particularly acute in structured finance products, where issuers are created and operated by a relatively concentrated group of sponsors, underwriters and managers, and rating fees are particularly lucrative.” (25) There is no easy solution to this problem and it is important to carefully study it on an ongoing basis.

The staff report is valuable because it offers an annual overview of structural changes in the ratings industry. This year’s report continues to highlight that the structure of the industry is far from ideal. As the business cycle heats up, it is important to keep an eye on this critical component of the financial system to ensure that rating agencies are not being driven by short term profits for themselves at the expense of long-term systemic stability for the rest of us.

Reiss in Newsday on Stimulus Program

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Newsday quoted me in State Faults Venture Capital Firm (registration required for full access).  The story reads in part,

New York State officials say Canrock Ventures, a venture capital firm in Brookville, failed to notify them of potential conflicts of interest when it invested taxpayer money in local technology startups.

An official with Empire State Development, the state’s primary business-aid agency, said under the terms of a written agreement with the state, Canrock should have convened a “valuation committee” to review its proposed investments of federal funds in four computer software startups.

The four businesses were co-founded by a Canrock partner, and the venture firm holds sizable stakes in them. The official requested anonymity.

Mark Fasciano, the Canrock partner, said yesterday that he disclosed all of Canrock’s holdings and his roles in the companies to the state at the start of the investment process.

*     *      *

Canrock’s 2013 contract with New York State, obtained by Newsday under the state Freedom of Information Law, stipulates that conflicts of interest are to be weighed by a valuation committee.

The Empire State Development official said the committee is composed of two state representatives and a Canrock representative, and can only been convened by the venture firm, not New York State.

“They [Canrock] have to disclose potential conflicts of interest to the valuation committee,” the official said last month. “They did not meet that requirement.”

*     *      *

Valuation committees were also included in the state contracts of six other venture firms investing Innovate NY money. None of the six called valuation committee meetings to handle conflicts of interest “because no conflicts had arisen,” an Empire State Development spokesman said.

Some experts questioned whether the valuation committees were effective.

David Reiss, a law professor and research director for Brooklyn Law School’s Center for Urban Business Entrepreneurship, said, “a self-reporting system,” such as the valuation committees, would only deter fraud if the probability of getting caught is high and the consequences are grave.

 “The likelihood of getting caught here sounds pretty low,” he said.

Reiss on FIRREA Penalties

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Bloomberg quoted me in S&P Faces Squeeze After $1.3 Billion Countrywide Fine. It opens,

Standard & Poor’s (MHFI)’ chances of settling the government’s lawsuit over mortgage-bond ratings for less than $1 billion may have slipped away after Bank of America Corp.’s Countrywide unit was socked with a $1.3 billion fine.

The Countrywide ruling was the first to lay out what penalties financial institutions could face under a 1989 bank-fraud law the Obama administration is using against alleged culprits of the subprime mortgage crisis. It has boosted the government’s hand against McGraw Hill Financial Inc.’s S&P, said Peter Henning, a law professor at Wayne State University.

“If the starting negotiation point for the Justice Department to settle was $1 billion before, that number has just gone up,” Henning said in a phone interview.

The U.S. sued S&P and Countrywide under the Financial Institutions Reform, Recovery and Enforcement Act, a law passed by Congress in the wake of the savings and loan crisis of the 1980s. The administration, which seeks as much as $5 billion from S&P, is using the law to punish alleged misconduct in the creation and sale of residential mortgage-backed securities blamed for the financial crisis two decades later.

For the Justice Department, the case against S&P goes to the heart of the financial crisis, attacking the company’s claims that its ratings — relied on by investors worldwide — were honest and neutral. S&P has countered that the case is really retribution for it downgrading the U.S. government’s own debt and it has subpoenaed officials including former Treasury Secretary Timothy Geithner in an effort to prove that.

Hearing Today

A hearing on the company’s request to force Geithner and the government to turn over records is scheduled for today in federal court in Santa Ana, California.

Countrywide was found liable by a federal jury in Manhattan for lying about the quality of the almost $3 billion in mortgages it sold to Fannie Mae (FNMA) and Freddie Mac (FMCC) in 2007 and 2008. U.S. District Judge Jed Rakoff in Manhattan agreed with the Justice Department that the penalty should be based on how much money the mortgage lender fraudulently induced the companies to pay for the loans.

“The civil penalty provisions of FIRREA are designed to serve punitive and deterrent purposes and should be construed in accordance with those purposes,” the judge said in his July 30 ruling.

S&P is accused of defrauding institutions that relied on its credit ratings for residential mortgage-based securities and collateralized debt obligations that included those securities. The government claims S&P lied to investors about its ratings on trillions of dollars in securities being objective and free of conflicts of interest.

*     *     *

Appeal Probable

The judge’s analysis, using the nominal value of the transactions as a starting point to determine the penalty, was “out of whack” and will probably be appealed by Bank of America to the U.S. Court of Appeals for the Second Circuit in New York, said David Reiss, a professor at the Brooklyn Law School.

“The Second Circuit has no problem reversing Rakoff,” Reiss said in in a phone interview. “The ruling pushes the balance of power in favor of the government by expanding the definition of a civil penalty.”

While other judges aren’t obliged to follow Rakoff’s reasoning, they will pay close attention to the decision because the federal court in Manhattan is the leading business law jurisdiction in the country and the ruling was clearly explained, Reiss said.