Whether your organization purchases businesses with real estate or invests in real estate directly, there’s always a risk of real estate fraud. Real estate transactions are complicated, making it relatively easy for crooks to manipulate the process.

To help mitigate real estate fraud threats, thorough due diligence is essential. Staying current on common schemes and red flags also may enable you to identify risky transactions before you put down any money.

Five Real Estate Fraud Schemes

First, be aware of these five common real estate fraud schemes:

1. Fake Documents. Every real estate transaction requires extensive documentation. To make an acquisition more enticing, sellers could fake rent rolls, financial statements, or other documents that indicate an asset’s profitability. Additionally, sellers might doctor environmental impact reports to, for example, hide the existence of toxic chemicals.
2. “Optimistic” Appraisals. Although most lenders will require an independent appraisal, some sellers may secure inflated real estate appraisals to justify a higher price. Or they may alter the date and valuation associated with an older appraisal to convince buyers to forgo a new one.
3. Flipping To Inflate Value. Sellers could inflate a property’s value by paying straw buyers to take ownership of it at inflated prices. At an agreed-upon date, the seller buys back the property, generating another sales transaction associated with the building.
4. Short-Selling & Buybacks. Shady sellers might use straw buyers to take out a loan to purchase a property and then default on it. The original sellers then offer to repurchase the property from the lender — usually at a rock-bottom price. Then the sellers make cosmetic improvements to the property and sell to unsuspecting buyers.
5. Falsified Financial Statements. Some business owners may inflate the value of real estate holdings in financial statements to make the overall organization more attractive to potential acquirers. This can include overvaluing properties, omitting liabilities, and inventing non-existent entities and transactions.

Red Flags

To succeed, real estate fraudsters need to manipulate or conceal an asset’s actual value. So look out for these red flags when buying real estate:

• Missing, altered, or unsigned documents,
• A seller who’s overly anxious about finalizing the deal and even suggests taking due diligence shortcuts,
• Real estate assets that have changed hands frequently for no apparent organizational reason,
• Difficult-to-locate ownership records or records that show complex ownership structures,
• Property descriptions that are inconsistent with inspection reports and public records,
• Renovations that seem superficial or shoddy, and
• Undisclosed or inaccurately disclosed liens, encumbrances, and judgments.

 
Also be wary if a seller requests additional payments outside the closing process — including payments to unknown third parties.

Inherently Complicated

Even valid real estate transactions can raise red flags that, upon closer inspection, aren’t, in fact, signs of fraud. Robust due diligence, a healthy degree of skepticism, and guidance from a real estate attorney and experienced financial advisors can help your organization buy property with confidence. Contact us for more information or for additional guidance.