Real Estate Scams to Avoid

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.”

Treasury’s Trojan Horse for The CFPB

The Procession of the Trojan Horse in Troy by Giovanni Domenico Tiepolo

The Hill posted my latest column, Americans Are Better off with Consumer Protection in Place. It opens,

This month, the Treasury Department issued a report to President Trump in response to his executive order on regulation of the U.S. financial system. While the report does not seek to do as much damage to consumer protection as the House’s Financial Choice Act, it proposes a dramatic weakening of the federal government’s role in the consumer financial services market. In particular, the report advocates that the Consumer Financial Protection Bureau’s mandate be radically constrained.

Republicans have been seeking to weaken the CFPB since it was created as part of the Dodd-Frank Act. The bureau took over responsibility for consumer protection regulation from seven federal agencies. Republicans have been far more antagonistic to the bureau than many of the lenders it regulates. Lenders have seen the value in consolidating much of their regulatory compliance into one agency.

To keep reading, click here.

The Lowdown on Blockchain & Real Estate

There is a lot of hype out there about the impact that blockchain technology will have on the real estate industry. There is no doubt that blockchain will be revolutionary over the long term, but its impact in the short term is much more limited. Spencer Compton and Diane Schottenstein have written an article for Law360 (unfortunately, behind a paywall), How Blockchain Can Be Applied To Real Estate Law, that provides a nice overview of where blockchain stands today in the real estate industry. It opens,

Real estate transactions are steeped in traditions that have hardly changed over hundreds of years. Today, as computer-based property recording systems are prevalent in our cities but roll out at a snail’s pace in rural areas (often hindered by strained municipal budgets), and e-signatures are little used (due to legitimate fears of fraud), arguably the real estate closing process has lagged in its use of computer aided technology. Yet other aspects of real estate ownership have been transformed by the internet: smart home technology to remotely control heating and lighting and monitor security; Airbnb which increases the value of real estate ownership and disrupts the hotel industry; and the real estate brokerage community’s design/photographic/communication technology to list and virtually show properties. Now add to our brave new world blockchain, a cloud-based decentralized ledger system that could offer speed, economy and improved security for real estate transactions. Will the real estate transaction industry avoid or embrace it?

What is blockchain?

Blockchain is best-known as the technology behind bitcoin, however bitcoin is not blockchain. Bitcoin is an implementation of blockchain technology. Blockchain is a data structure that allows for a digital ledger of transactions to be shared among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority such as a bank or trade association. Using algorithms, the system can verify if a transaction will be approved and added to the blockchain and once it is on the blockchain it is extremely difficult to change or remove that transaction. A blockchain can be an open system or a system restricted to permissive users. There can be private blockchains (for ownership records or business transactions, for instance) and public blockchains (for public municipal data, real estate records etc.). Funds can be transferred by wires automatically authorized by the blockchain or via bitcoin or other virtual currency. Transparent, secure, frictionless payment is touted as one of blockchain’s many benefits.

The article goes on to answer the following questions:

  • How does a blockchain differ from a record kept by a financing institution or a government agency?
  • How is a blockchain transaction more secure than any other transaction?
  • How widely is blockchain used?
  • How blockchain is being used to record real property instruments?
  • How might blockchain affect the role of title insurance companies?

If the impact of blockchain on the real estate industry has mystified you, this primer will give you an overview of where things stand today and maybe tomorrow too.

 

Common Mortgage Myths

image by Nevit Dilmen

Newsday quoted me in Don’t Fall For These 4 Common Mortgage Myths. It reads,

With the spring home buying season just around the corner, it’s a good time to separate fiction from fact.

Here are four common mortgage myths.

MythHome buyers must put down 20 percent.

Fact“While that may have been true a long time ago, there are a number of alternatives. Federal Housing Administration-insured loans can have 3.5 percent down payments. Fannie Mae and Freddie Mac both have programs with 3 percent down payments. One major lender has come up with a program with a 1 percent-down mortgage, but there are some significant restrictions on who qualifies for that program,” says David Reiss, a law professor specializing in real estate at Brooklyn Law School.

MythMy bank knows me, loves me and will give me a deal.

Fact“Mortgage lending is regulated by nationwide underwriting standards that all lenders must follow. Since virtually all lenders obtain money to lend from the secondary mortgage markets, the mortgage rate one can obtain will be virtually the same regardless of the lender chosen,” says Warren Goldberg, president of Mortgage Wealth Advisors in Plainview.

MythPrequalification means you’re approved and will get the loan.

Fact“Pre-qualification is not a binding agreement. Lenders may require additional information before issuing the loan. Pre-qualification gives you an idea of how much you can borrow before you start looking at homes and shows sellers that you’re committed and can afford the home,” says Bob Donovan, Bank of America’s divisional sales executive for the metropolitan region in Manhattan.

MythI’ll close in 30 days.

Fact: “That’s rare now. The turnaround from application to closing is about 50 days,” says Sam Heskel, CEO of Nadlan Valuation in Brooklyn.

 

Mortgage Broker v. Loan Officer

photo by http://401kcalculator.org

MagnifyMoney.com quoted me in Mortgage Broker vs. Loan Officer: The Best Way to Shop for a Mortgage (must scroll down). It opens,

When you need to take out a loan to buy a home, you generally have two options. You can work with a lender’s loan officer or hire a mortgage broker. Loan officers and mortgage brokers are not the same thing, although the terms are often used interchangeably.

Loan officers work for a bank or a lender and will only be able to show you mortgage options from that financial institution. In contrast, mortgage brokers are individuals or firms that are licensed by a state to act as middlemen between you and multiple banks or mortgage lenders. Because brokers aren’t beholden to a particular lender, they can shop around and try to find you a loan with terms that best fit your circumstances.

Why should you consider working with a mortgage broker?

One of the biggest benefits to working with a mortgage broker is that they take over the job of shopping for a loan. You might be able to do this on your own, and in some cases, you could find a better loan than the broker, but it can be a time-consuming and complicated process.

A broker can help collect and organize the documents you need to apply for a mortgage, such as your proof of employment and income, tax returns, a list of your assets and debts, and credit reports and scores. The broker can then use the information to look for loans, compare rates and terms, and apply for mortgages on your behalf.

Casey Fleming, a mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage,” says one of the big benefits is that brokers are generally “on your side,” while a loan officer represents the lender’s interest. Brokers are also incentivized to find you a loan that meets your needs and see the deal through closing because they don’t get paid until you close on the home.

Additionally, brokers might have access to lenders that don’t work directly with consumers, meaning you wouldn’t be able to get a loan from the lender even if you tried. And in some cases, brokers can leverage their relationship with a lender to get it to waive fees you’d otherwise have to pay.

Are there risks involved with using a mortgage broker?

While working with a broker could be a good idea, there are potential drawbacks to consider. “Not all brokers are created equal,” says Fleming. “Many have only a few sources for loans, and may not be able to find the best pricing.” There are also some mortgage lenders that don’t work with brokers and will only offer loans directly to consumers (through one of the lender’s loan officers).

Using a mortgage broker can also be expensive. Although you may find the services are worth paying for, consider the costs of using a broker:

Mortgage broker fees

Mortgage brokers are often paid in one of two ways. You may be able to choose how you’d like to pay the broker, or opt for both payment methods.

Some mortgage brokers will charge you a commission based on the loan you take out, often about 1% of the loan. For example, that’s a $3,000 fee on a $300,000 mortgage loan. You’ll pay this fee as part of your closing costs when you close on the home.

Other brokers may offer you a fee-free mortgage. However, what likely happens in this case is that the mortgage broker arranges a loan with a higher interest rate, leaving room for the lender to give the broker a cut. This route could cost you more over the lifetime of the loan but might be the better option if you want to minimize costs now.

Where to find a good mortgage broker

“Word of mouth is very useful when it comes to finding a good [mortgage broker],” according to Professor David Reiss, a real estate law professor at the Brooklyn Law School in Brooklyn, N.Y. You could ask friends or family members who’ve recently bought a home if they used a mortgage broker, as well as your real estate agent if he or she can recommend a broker.

However, don’t settle for the first recommendation you receive. The Federal Trade Commission recommends interviewing several brokers and trying to find one who’ll be a good fit for your home search.

Ask about their experience with buyers like you in the area, the fees they charge, and how many lenders they work with. “You want to know whether the mortgage broker can find competitive mortgage products, is well organized so that loans close in a timely manner, and whether it keeps away from bait-and-switch tactics that can be so difficult to deal with when buying a home,” says Reiss.

Preparing for Surprise Closing Costs

photo by Chris Potter

The Wall Street Journal quoted me in Buying a Home? Prepare for Surprise Closing Costs. It opens,

Note to house hunters on a budget: A home’s sale price isn’t really the sale price—there are lots of closing costs and expenses that jack up the final number.

According to online real-estate listings site Zillow, buyers typically pay between 2% and 5% of the purchase price in closing costs. So if a home costs $300,000, that buyer can expect to pay between $6,000 and $15,000. Since the financial crisis, there’s more transparency on the part of lenders when disclosing the costs associated with a mortgage, so buyers know in advance how much they’ll need for the closing. But experts say that might not be enough.

Lender fees are only one part of the total cost of homeownership. Buyers must also pay appraisers, home inspectors and settlement agents, as well as the cost of title insurance, homeowners insurance and property taxes. And the fees don’t stop at the closing. Utilities, regular home maintenance and unexpected repairs add up as well—and can derail even the most experienced buyer.

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Here are a few considerations to help you avoid surprises at the closing table.

Stash your cash. There is no real rule of thumb as to how much money buyers should put aside in addition to the balance of the purchase price and closing costs. But the more, the better. “You definitely want an emergency fund,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “Appliances have a habit of breaking right after you buy a house.”

Close on the last day of the month, or just before. One of the fees due at closing is prepaid interest, the daily interest charge accruing between the closing and the day on which your first mortgage payment is due. Closing on the last day of the month reduces this upfront cost.

Get an estoppel letter from the association. Your real-estate agent or attorney may obtain this letter, which lists the maintenance fee, when it’s due, any required escrows or membership fees and whether a special assessment has been levied. Review this letter carefully, and compare it with the purchase contract to make sure all fees are apportioned accurately between buyer and seller.

The New Mortgage Disclosure Rules

President Barack Obama meets with Rep. Barney Frank, (D-Mass), Sen. Dick Durbin, (D-Ill), and Sen. Chris Dodd, (D-Conn) by White House (Pete Souza)

TheStreet.com quoted me in New Mortgage Rule Requires Disclosure Documents to Help Consumers Compare Costs. It reads, in part,

A new set of shorter and simpler mortgage documents will be disclosed to consumers before they close on a loan, making the costs more transparent and helping home buyers compare offers from multiple lenders easier.

Mortgage lenders are required to start giving loan applicants the new disclosure documents starting on October 3, a new government requirement imposed by the Dodd-Frank Act.

“The disclosures will be easier and shorter so that consumers understand the mortgage they are getting because it will be simpler to compare offers,” said Holden Lewis, a mortgage analyst for Bankrate.com, the Palm Beach Gardens, Fla.-based financial content company.

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Drawbacks of New Documents

Of course, it’s not all positive. You can now expect your closing to take longer than before while lenders and title companies adjust to the new procedures. Consumers should definitely lock in their interest rates “a little longer to be safe in case there are delays,” he said. The process might stretch to three days, so lock in your mortgage rates for 45 days instead of the traditional 30 days and “err on side of caution,” Lewis said.

 Major changes to the terms in a mortgage can push back the closing and this can present a serious problem if the current interest rate lock is “on the verge of expiring and interest rates are rising,” said David Reiss, a law professor at Brooklyn Law School. In a worst case scenario, a lender could withdraw an offer because the consumer cannot afford higher monthly payments due to an increase in interest rates.

Homebuyers can mitigate this issue by negotiating the terms of their interest rates cautiously and discussing them with their lender or real estate broker who can help determine “whether there is enough of a cushion to take into account all of the things that can delay a closing,” he said. “Borrowers should know that a rate lock without a sufficient cushion of time offers a false sense of security.”

Closing on a house might take longer, so consumers should make sure their timing meshes with the apartment or house they are renting or if they are selling their current home. This is more critical right now because of the transition to the new documents.

“Through the end of the year, homebuyers may want to build in a cushion as to when they have to close on the purchase,” Reiss said. “This could offer some protection if the mortgage application process takes longer than expected because of TRID-related issues.”

If tax reasons are prompting homeowners to close on a sale by a certain date, then it is even more vital to focus on documents a buyer, lender or tittle company might require during the process.

“As with many things, staying on top of everyone at each stage such as the contract negotiation, mortgage application and closing is the best bet for avoiding surprises and bad results,” he said.