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5 Types Of Mortgage Frauds And How To Protect Yourself
If you don’t already know, the capitalistic world can be a dangerous place for gullible people.
Elaborated scams have been around for as long as anyone can remember. And real estate with it’s considerable amount of money involved is one of the preferred vehicle of choice for con-men.
But since financial criminals are after the money, why not focus on the mortgage instead of the physical property itself?
The following are some common forms of mortgage frauds that you should be careful in avoiding.
1) The flip
Not to be confused with typical real estate flippers which is a legitimate business operation, the flip transaction is one of the most basic fraudulent movement of funds.
What happens is that a middleman or ghost become the centerpiece of a three-way transaction.
For example, a transaction from party A to B to C, with B being the “ghost”. Party A will be a legitimate seller who may or may not have any knowledge of the scam at all. While party C can either be a legitimate buyer or another fake entity.
If the house in question is sold for $200,000 from party A to B, B then upsells it to C for $300,000. The difference of $100,000 will then be pocketed by B.
Because lenders typically lend based on loan-to-value (LTV), the key to this process being possible concerns a higher phony appraisal value in order to obtain a mortgage of $300,000 for party C. Resulting in a loan far in excess of what the property is actually worth.
But the key to the success of such a scam is for the B to C transaction to close before the A to B transaction. This is because money from the former deal is required to pay for the latter deal.
$300,000 will then be obtained to pay off the $200,000. And the fraudster keeps the $100,000 for himself. Good day in the office.
It has become very difficult for this scam to execute these days as banks are now using computer programs to run a lot of their operating functions. This can make it impossible to close the B to C transaction before the one involving A to B.
Human intervention will need to be involved for them to go through.
2) The magic price
This is actually a scheme that is still widely attempted today.
What happens is that when a deal has been reached for let’s say $250,000 between a willing buyer and seller for a house worth $400,000, the buyer might request the seller to forge a document to state that the agreed price is actually $400,000.
This allows the buyer to walk up to a lender and apply for a mortgage for the $400,000 transaction.
If all goes well, the lender approves the loan and disburses the funds. $250,000 of which will be used to pay the seller. And the balance be kept by the buyer.
In frauds like these, the seller usually will only agree to cooperation only if he receives a kick back of some kind.
If you have been in the industry long enough, you will know that such scams are easy to replicate as long as you are willing to put in the meticulous effort required.
In fact, if you have a partner who you can really trust, only a sharp-minded investigative banker will be able to unveil your evil plans.
3) The “undesirable” add-on renovation expenses
In such a scenario, the buyer includes the considerable costs of improvements to the property into the appraised value.
If for example, a deal is agreed at $300,000, the buyer will file for a mortgage for $500,000 that include the improvement costs with supporting documents in the form of quotes.
These contractor quotations will either be drafted by a dubious entity or forged in every detail.
Based on the $500,000, a lender agrees to the mortgage and have the funds disbursed.
No improvement works are ever conducted by the “contractor” and the buyer keeps the change.
This is another elaborate scheme that can be easy to execute.
Unless the fake quotation is unearthed during the application process, the only way a bank will discover the fraud is if a site inspection is conducted some time after the mortgage is disbursed.
Even so, the “contractor” can sidestep this with cosmetic improvements and claim every service was delivered properly.
4) Outright blatant lying
It is understandable that lenders would only want to lend to borrowers who can afford to pay the loan.
Even if a borrower is just requesting a 40% LTV, a lender would gladly decline the request should they find that the personal income of the borrower is too low to afford it.
The problem now is that there are more and more lenders who require minimum documentation for loan approvals. And a lot of the required application documents can be forged.
Even if someone is too lazy to forge a tax statement, he can still legitimately “fake” it by declaring a high income. Then paying off the liable taxes.
With this official tax statement containing the self-declared inflated personal income, this individual can then use it to justify to lenders to approve a huge loan.
Mortgage fraud with stated income is still a huge problem today, and sometimes called liars loans.
5) The investors shortcut
New real estate investors are often the most gullible in a complicated industry. This is why they are often targeted by the bad guys.
In this case, an intelligent but crafty mortgage broker would go after first-time investors eager to have some skin in the game.
He would then setup mortgages for the victims to buy houses at a low price. At the same time, promising management of the properties… enabling the investors to make money without doing anything…
The problem is that these houses are often those that have been unable sell for months or years. So much so that the developers are willing to let go for low prices. This enables the broker to set up flip transactions as describe in point #1 with himself being the “ghost”.
Moreover, many of these properties in question are located in a foreign country which makes it even more difficult for the investors to conduct their own investigations.
Within a year, most victims would usually realize that they have been duped and left holding the bag… containing the mortgage liability.
These are legitimate scams that are thriving in the modern world. There is little you can do to get your money back once you become a victim.
The worse part is that many of these rookie investors are so clueless that they think their investments are not performing due to low demand from tenants. When in fact they have been set up to fail from the start!
Signs of fraud
While you can be sure that the authorities take these scams seriously, you must absolutely be more informed about them in order to avoid them in the first place.
Here are some suspicious signs to alert you of possible criminal activity.
- Buyers offering to buy way above the asking price
- Professionals offering information on how to jack up appraisals in excess of sales price
- Sellers receiving excess proceeds from the sale that makes no sense
- Professionals that don’t seem to be knowledgeable in their area of work and expertise
- Unknown factual information that is supposed to be disclosed by all parties
- Second mortgages that had not be declared
- Promotion activities of foreign property when they should not be any lack of local demand
When discovering that you are positioned right in the middle of questionable real estating activities, the smart thing to do is to walk away as soon as you can. Going any deeper will only give the bad guy more opportunities to reel you in.