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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.”

When Buyers Change Their Minds

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The Wall Street Journal quoted me in When Home Buyers Change Their Minds (behind paywall). It opens,

The offer was accepted. The mortgage was approved. What happens when the buyer gets cold feet and wants to back out of the deal?

Jason Michael faced this issue about 18 months ago when he listed his three-bedroom home in St. Louis. Mr. Michael, a 36-year-old public-relations executive, asked $130,000 for his home and accepted an offer for $127,000. The buyers posted a $1,000 deposit of “earnest money,” completed inspections, negotiated repairs and were approved for a mortgage.

Then they told Mr. Michael that they had found another house and didn’t want to move ahead with the purchase.

While the contract allowed Mr. Michael to pocket the deposit if the buyers defaulted, they refused to authorize their agent to release it. Only after Mr. Michael threatened to sue did they surrender the $1,000.

“My agent had said that people don’t back out of house purchases—that this won’t happen,” Mr. Michael says. “But now I approach it as if the buyer can back out until the very last minute.” He ultimately decided to rent out the house.

According to an online survey of 2,241 adults conducted for finance website Nerdwallet.com in January, home-buyer’s remorse isn’t uncommon. Nearly half (49%) of homeowners who responded said they would do something differently if they had to go through the process again. Broken down by age group, 61% of Generation Xers (the mid-1960s through the 1970s) and 57% of millennial homeowners (born in the early 1980s through about 2004) indicated they had regrets. Many wished they had bought a bigger home or saved more money before buying.

*     *      *

Here are a few things to consider if you might want to back out of your real-estate contract. Buyers and sellers should consult a qualified real-estate attorney for advice.

• Craft carefully. Rather than having a mortgage contingency allowing you to obtain a mortgage “at prevailing rates,” specify that the mortgage rate can be no more than 4%, for example. Or, consider making the contract contingent on the mortgage actually being funded by the lender. “This extends the contingency all the way to the closing,” says David Reiss, a Brooklyn Law School professor who specializes in real estate.

• Sharpen your negotiation skills. Even if you can’t back out legally, try to negotiate a reduction or return of the deposit with the seller. In a market where prices are rising and the homeowner can get a higher price for their home, there might be a chance to come to terms.

• Remember the broker. Even if the seller lets the buyer off the hook, he may still be liable to the broker for the commission. Contracts state that the commission is due when the broker finds a ready, willing and able buyer. Many brokers will work with the seller in this situation, Mr. Haber says, but it is an issue that needs to be addressed.

 

What Is a Probate Sale?

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Charles Dickens' Bleak House

Charles Dickens’ Bleak House

Realtor.com quoted me in What Is a Probate Sale? A Home You’ll Have to Win in Court. It opens,

If you’re looking to buy a home on the cheap, you might have stumbled across a probate sale. But what exactly is a probate sale? Basically it means that the homeowner died without a will bequeathing the house to an heir. In most cases, this means that an estate attorney or representative has to sell the property in order to liquidate the asset and distribute the money to family members—and that can spell a major bargain for you.

Probate sales can be attractive to buyers because they’re often priced below their market value, much like foreclosures. But since a court has to supervise and approve the home’s sale, the process is more complicated—and lengthier—than usual.

Here’s a look at the legal hoops you’ll have to jump through to make a probate sale happen.

How A Probate Sale Works

In a probate sale, the estate attorney or other representative hires a real estate agent to post the listing and sell the home. While buyers may be drawn in by the budget-friendly price, probate homes are not for everyone, starting with the fact that the homes are typically sold as is.

“Usually the estate doesn’t have an interest in renovating the property, either because of logistics, timing, or available funds,” says Richard Witt, owner of Long Island Cash Home Buyer. So, don’t expect the estate owners to make any repairs before you move in; what you see is what you get. That said, those in the know advise getting a home inspection just to make sure there aren’t major problems that would deter you from moving forward.

Here’s another difference with probate sales: If you decide to make an offer, that must be accompanied by a deposit totaling 10% of the price of the home. That’s in addition to your down payment, although this deposit can be folded into your down payment if the deal goes through.

Once your offer is accepted by the estate’s representative, that’s not where the negotiations end. From there, the estate attorney has to petition the court to approve the sale. And as you might expect, courts move at their own pace; expect to wait 30 to 45 days (or even longer) for your day in court when you can claim your home.

Playing the waiting game isn’t the only frustrating aspect of probate sales. In certain states, even as your offer is making its way through the courts, the home can remain listed and be open to other bidders who may be allowed to show up at your hearing and outbid your offer.

“In California, for instance, probate homes typically do go up for auction at the courthouse after the offer comes in,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “This builds a lot of uncertainty into the process for the bidder who gets the ball rolling in the first place.” All that said, you also have a right to counteroffer and, even if you do lose out, you should at least get your 10% deposit back.