Real Estate Fraud: Could You Spot It?

We listed a property for $449,000 located in an area with several million-dollar homes. The house could easily sell in the $500,000 to $600,000 range with a few modest updates.

We quickly received two offers, one for $390,000 and another for $400,000 from an agent at a local realty company. The agent had a purchase contract the seller ultimately accepted. They requested we remove the listing from the MLS for privacy reasons. The purchaser put up $10,000 in earnest money (actually a copy of a verification of $100,000 on deposit). He had pre-approval to borrow $400,000 more.

Right before closing we received a call from the agent. He and the loan officer wanted to meet with us in person. The loan officer explained that the property had appraised for $575,000, and he wanted to raise the price to match. The seller could simply cut a check for $175,000 back to his (the loan officer's) construction company for repairs. The loan officer would receive only $40,000 for his services. The remaining $135,000 would go toward repairs and back to the buyer and others.

On its surface, this transaction might appear perfectly legitimate. After all, the house appraised for $575,000. There's nothing wrong with cashing out some equity, right? In this case, however, the appraisal was part of a carefully orchestrated scam.

For the con to work, it required a savvy recruiter and ringleader, the loan officer, along with several willing parties—the buyer's agent, the buyer, and the appraiser. The ringleader convinced the others that the transaction was legitimate, and everyone stood to gain something. The buyer's agent would receive a larger commission. The buyer would get a house and some cash. The loan officer would receive $40,000. And the appraiser would get a kickback. Too bad the lender was left out of the loop, because he was the one who would get left holding the bag.

After meeting with the buyer's agent and the loan officer, I called the FBI and reported the incident. Shortly thereafter, the loan officer and 19 others were indicted for real estate and mortgage fraud for deals similar to this one.

The warning signs were there: the buyer's agent and the buyer's request that the listing be removed from the MLS for "privacy reasons," the buyer's $100,000 earnest money in the form of a copy of a verification of deposit (which turned out to be fictitious), an obviously inflated "as is" appraisal, and the loan officer's insistence that the price be raised to $575,000.

The warning signs were there, but all too often they're overlooked. As real estate professionals, we need to train our instincts, remain vigilant, and work with law enforcement to shut down these scams. The future of our industry depends on it.

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