Real Estate Scams to Watch Out For

Jul 7, 2022

Most home buyers or sellers assume the hardest part about real estate transactions is dealing with the transaction itself. However, if you get stuck dealing with a real estate scam, that isn’t the case.

Whether you’re a first-time homebuyer looking for their first house, a long-time owner looking to sell quickly, refinance a mortgage, avoid foreclosure, or anything in between, you’re potentially at risk of encountering real estate scams. Knowing about real estate scams allows you to keep your eyes open for red flags.

Here are a handful of real estate scams to watch out for as you work to buy or sell a property.

person looking up houses on laptop

Real Estate Scams That Buyers Should Watch Out For

The Fake Seller

When searching for properties on sites that allow sellers to post their homes, there’s always a chance of encountering a fake seller. While this is largely considered one of the Craigslist real estate scams, it can actually occur on any website where for-sale-by-owner (FSBO) properties are listed with little oversight.

With these, a person puts up a property – often at a stellar price – claiming it’s theirs. Additionally, they usually list it as FSBO, which is simpler to accomplish as a for-sale-by-owner scam. However, they don’t actually own the home. But they’ll go the extra mile to convince the buyer that isn’t the case, aiming to at least secure some form of deposit before the truth comes out.

Escrow Wire Fraud

With escrow wire fraud, the scammer contacts a buyer and claims to be from the title or escrow company. They’ll provide instructions about where to send escrow funds using emails, websites, and similar portals designed to look legitimate.

If you follow the instructions, your money is sent to the scammers, not a legitimate escrow or title company. By the time you notice, the scammers have usually moved the money elsewhere, giving you few options for getting it back.

Real Estate Scams That Sellers Should Watch Out For

Lock-Out Agreements and Fees

Lock-out agreement-based scams are more commonly encountered by sellers who need to sell quickly. Usually, scammers seek out FSBO properties with lower list prices or ads that indicate the seller is motivated, as the seller isn’t using the expertise of a Realtor® and is looking to move fast.

With this scam, a prospective buyer promises a fast sale while presenting a contact that contains a lock-out clause. With a lock-out clause, you’re contractually barred from selling the house to anyone else. The scammer then starts demanding processing fees or a price reduction to move the sale forward.

Suing to Force Negotiations

Suing to Force Negotiations

This scam allows a scam buyer to use pending legal action to delay the sale to secure a lower price. Usually, this manifests with the buyer requesting a discount in the closing phase, citing a vague reason as justification. If the seller declines, the buyer files a suit, leading to a notice of pendency on the property. At that point, the seller generally can’t sell to another person, leaving them stuck negotiating with the buyer or battling it out in court.

Flopping

Technically a short sale scam, flopping occurs when the buyer essentially convinces the primary lender that the property is worth less than it is, allowing them to get a better price. Usually, the seller’s agent is set up to benefit from the scam, as they can withhold any other offers on the property to ensure the seller and lender are unaware of higher ones on the table. Without that, an attempt to devalue the property usually won’t work.

Foreclosure Rescue Scam

Also known as a mortgage relief program scam, foreclosure rescue scams are typically real estate scams against sellers looking to sell to avoid foreclosure proceedings. Scammers may identify troubled sellers by looking for listings that indicate the seller is highly motivated. They might also look for signs of financial trouble, such as past-due notices showing up in a person’s mail. It’s common for scammers to reach out to people en masse as well, often using robo-dialers, widescale phishing emails, and similar broad dispersion options.

Usually, foreclosure scams promise to stop foreclosure proceedings or modify mortgages to make them manageable in exchange for a fee. Often, they mention some sort of relief program that they say is operated by the government and may tie that program into a recent event, such as the pandemic. However, no such program exists, and they aren’t going to render any aid. They simply leave with the money.

Real Estate Scams That Everyone Should Watch Out For

Unsolicited Buyer Scams

An unsolicited buyer scam can impact any homeowner and usually unfolds in one of two ways. First, a scammer may intend to make a purchase but come in with a lowball offer. This is more common with homes in disrepair, particularly those owned by the elderly who may not know the actual value of their home. That makes those properties potential targets for scammers looking for houses they can secure far below market value.

Second, the scammer may essentially be phishing for information. The precise reason for this form of real estate phishing could vary depending on the type of scam they want to run. However, the goal is to collect sensitive details about an adult in the home. 

Short Sale Fraud

fraud in real estate

Short sale fraud can impact both buyers and sellers if a short sale property is involved. Additionally, short sale scams can take several forms, some of which don’t just financially harm the buyer or seller; they lead the buyer or seller to commit fraud, which is a crime.

One short sale scam occurs when the seller’s primary lender begins capping payments and commissions to third parties involved in the sale, such as real estate agents or short sale negotiators. Since not all professionals are reputable, the third party that feels slighted may approach the buyer or seller requesting an off-the-books payment to offset their losses. While this seems innocuous, it isn’t, and the buyer or seller that offers that payment ultimately commits fraud.

Another short sale scam is a typical predatory approach. Both buyers and sellers may be targets, though sellers may be focused on more often because they’re vulnerable in this situation. In most cases, a fake short sale negotiator will try to gain the buyer or seller’s trust, requesting a fee in exchange for getting the deal moving. However, after paying the money, the negotiator essentially does nothing but walk off with the money.

Loan-Flipping

One of the home refinance scams, loan-flipping, happens when a scammer convinces a current homeowner to refinance a property multiple times. Along the way, the scammer charges fees and points, increases the interest rates and encourages the homeowner to dig deeper into their home equity.

Usually, the scammer makes some sort of promise to encourage the flipped loans. Still, the ultimate goal of the con artist is to simply collect as much fee money as possible, often leaving the homeowner in dire straights with the conditions associated with the final mortgage.

Title or Deed Fraud

While this has the biggest impact on sellers, it can harm buyers, too, as it typically causes what should be a legitimate purchase to fall through. Here, a scammer – unbeknownst to the selling homeowner – has transferred ownership of the property to another individual. As a result, the seller doesn’t seem to be the official owner of the home, so the sale can’t move forward.

For sellers, there’s more to deal with, as undoing a title scam is often costly. Plus, before it comes up during closing, the signs that anything is wrong are subtle, often being little more than not seeing property tax bills roll in when they should.

Avoiding Real Estate Scams

If you want to avoid common real estate scams like those above, start with due diligence. Avoid upfront fees you aren’t expecting, be suspicious of last-minute changes, and watch out for anyone applying a lot of pressure. Also, avoid off-market or off-escrow transactions, and make sure not to provide personal or financial details to anyone you don’t trust.

Finally, one of the best steps you can take if you want to avoid real estate scams is to work with a reputable, reliable Realtor® when you’re buying or selling. They’ll help guide you through the process and keep you highly informed during each step, making the process as secure as possible.

 

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