26 - Top 10 Real Estate Scams & How to Avoid Them

We're looking at some of the most devious scams and practices that could happen to first-time home buyers. From fake rental listings, bait and switch schemes, to the devastating impact of title fraud - we expose the top 10 that can affect you. 

We look at the importance of title insurance and the potential pitfalls related to property titles. It's not about scaring you, but empowering you with crucial information. We look into the dark world of predatory lending and home improvement scams, loan flipping, the cybercrime of escrow wire fraud, and the deceitful world of scamming contractors. 
But we're also arming you with practical steps to combat these scams. We discuss the importance of due diligence, understanding the fine print of your loan terms, and the value of an independent home inspection. Remember, knowledge is power, and power is what you will gain from this enlightening episode. So tune in, and let's fight these scams together.

Transcript

Speaker 1: 0:00

Hello again and welcome to the first time home buyer podcast, your go to resource for navigating the exciting journey of purchasing your first home. In today's episode, we're going to shed light on some common real estate scams. Every prospective homeowner should be aware of these. It's crucial to be well informed and equipped with knowledge to protect yourself from falling victim to these practices. Whether you're just starting your home buying process or maybe you're already in the middle of it, this episode will arm you with essential information to stay safe and make confident decisions. Here are 10 common real estate scams that first time home buyers should be on the lookout for.

Speaker 1: 0:52

Number one fake rental listings. This type of scam involves the fraudulent representation of homes for sale as rental properties. Scammers usually steal online listings of homes that are for sale, replicating them as rental listings to deceive prospective tenants. They typically aim to secure a quick security deposit from the prospective tenant before they disappear. So let's look at this in a little bit more detail. The scam setup scammers might target vacant homes for sale and use those photos to create new rental listings. In some cases, they'll claim that the owners are out of town and offer a code for you to enter the home. Alternatively, they might even encourage you to break into the home under the pretense of a faulty door keypad. So let's talk about trusting your instincts. If a deal seems too good to be true, it probably is. If the landlord asks you to do something that seems suspicious or unorthodox, take a moment to reconsider. What a legitimate homeowner really want you to break into their property? All right, let's identify the theft risk.

Speaker 1: 2:03

One of the more sinister aspects of rental listing scams is that they often involve an application process that asks for very personal information. This could potentially be used for identity theft. The landlord might request information like your social security number, bank account details, copies of your photo IDs or other personal identifiers, which they could later use fraudulently or sell to people who will use it fraudulently. So how do you protect yourself against fake rental listing scams? Here's a few steps. Conduct thorough research on the property and the individual or company renting it out. Always view the property in person before sending any money, if that's possible. Be wary of landlords who seem overly eager to collect the security deposit before signing the lease, and avoid sharing personal information until you've verified the legitimacy of the listing and the landlord. Consider seeking help from a real estate agent or a property management company who can help verify the legitimacy of a rental listing. They have access to tools and databases that can help verify property ownership and other crucial details. And last, trust your instincts. If something seems off about the situation or the person you're dealing with, walk away.

Speaker 1: 3:22

The next one bait and switch schemes. In this tactic, scammers advertise an appealing low-cost property to attract potential buyers or renters. However, once you express interest, you're informed that the property is no longer available and are redirected towards pricier options. Bait and switch schemes are intended to lure prospective buyers or renters into considering a more expensive property or different investment opportunities than they initially intended. So let's break it down a bit here. The bait the scam begins with an alluring property listed at an incredibly low price. This property seems like such a great deal that it immediately grabs the attention of potential buyers or renters. The switch Once the interested party reaches out, the scammer will claim that the property has already been sold or rented. However, they conveniently have other, more expensive properties available for consideration. Alternatively, they may suggest other investment opportunities that require higher capital. It's worth noting that even real estate agents or lenders use these types of tactics to attract new clients. They post irresistible listings to grab attention and then shift the client towards different properties or loan options.

Speaker 1: 4:39

So how do you guard against bait and switch schemes? Buyers and renters should be wary of deals that seem too good to be true. A property listed at an unbelievably low price may be a scam. Conduct thorough research on the property and the individual or company listing it. Get everything in writing, including the property details, pricing and any other promises made. Make sure to trust your instincts If something feels off. It may be better to walk away and consult with a real estate attorney or trusted advisor if something seems amiss.

Speaker 1: 5:12

The next one is title fraud. This occurs when a scammer uses false documents to make it look like they own a property, then sell it or take out a mortgage on it. Homeowners can guard against this by regularly checking their credit ports. From a first-time homebuyer perspective, this is most important when you're purchasing a home and making sure that the title company conducting the closing is reputable. Title insurance is a type of insurance that helps protect both buyers and lenders against any losses from problems related to the property's title or deed. It's usually required by lenders as part of the closing process for a mortgage loan. Title insurance can help against losses due to issues that may have arisen in the past, such as forged deeds, unrecorded leans or encroachment disputes. We highly recommend getting title insurance, and it can safeguard you against these types of scenarios. There are a variety of potential issues that can arise with the title of a property. For example, a title may have been inaccurately transferred due to errors in paperwork or administration, leading to legal disputes between current and former owners. If any leans have been placed on the property by creditors of past owners, these will need to be cleared before any sale can go through. Title fraud is one of the oldest real estate scams in existence, and it can have serious consequences for unwitting buyers.

Speaker 1: 6:36

The next is called loan flipping. Predatory lenders often use this tactic to convince homeowners to repeatedly refinance their mortgage, typically borrowing more money with each new loan. While this increases the lender's profits through fees, it seldom advantageous for the homeowner. The practice of loan flipping can actually be very detrimental for homeowners, as it gives them more debt than is either necessary and sometimes even manageable. With each refinancing, borrowers are subject to an array of extra charges, such as origination fees, closing costs and other related expenses. Over time, these added costs can considerably overshadow any initial benefit derived from that refinancing of the loan. Borrowers may inadvertently become victims of unethical lending practices, where they're either misinformed or coerced into agreeing to terms that are beneficial for the lender but potentially harmful for them.

Speaker 1: 7:39

It's crucial for homeowners to thoroughly evaluate all available options before committing to any financing agreement. This will help them fully comprehend what they're signing up for and avoid falling prey to schemes like loan flipping. I want you, as a first-time home buyer, to also think about the potential refinancing that your lender may be talking about. If you're purchasing in a higher interest rate environment, like we're seeing right now, in 2022 and 2023. You may not be able to refinance and you're not going to want to refinance multiple times, and you're not going to want to refinance if it doesn't have any kind of monetary gain for you, if there's no benefit for refinancing. So make sure you really think hard about doing that.

Speaker 1: 8:26

This next one is really one of the worst, and it's something that we see more and more, and it's escrow wire fraud. It's a sophisticated cybercrime, but it can result in substantial financial losses for anyone involved in the home buying process, and here's how it kind of plays out. Typically, what happens is a scammer's going to infiltrate the email account of someone involved in the transaction. Sometimes that's a real estate agent, maybe a broker or attorney. They do this through all kinds of different ways hacking or phishing. In some cases, they may actually create an email account that looks very similar to a legitimate one, maybe just changing a letter. Hopefully, the victim won't notice the slight difference. They'll use the same kind of signature, all of that, so it looks like it's coming from one of the sources that you've been working with. Once they have access to an email account or some way that they're monitoring the communications, they're going to learn about the timeline, the parties involved and, most importantly, when and where the down payment will be made. In some cases, they'll simply monitor social media accounts of agents or other real estate marketplaces like Zillow or Homescom. Many agents use the same escrow team or lawyers, so they'll likely know the person who'll be working on the transaction.

Speaker 1: 9:43

The next step is impersonation. When the time's right, typically just before the down payment's going to be made, the scammer's going to send a fraudulent email to the home buyer. This email appears to come from a trusted source, like the real estate agent, the escrow company or the attorney, and includes instructions to wire the down payment into a new bank account, which is then controlled by the scammer Theft. If the home buyer follows the instructions, they end up wiring their money directly to the scammer's account. By the time the fraud is noticed, the scammer is typically withdrawn the money and disappeared, making recovery of the funds difficult or impossible.

Speaker 1: 10:23

One thing I hear over and over for people who have gotten involved in this is that they were sending money from maybe a Wells Fargo account to a Bank of America or some kind of bank that they were comfortable sending money to, and what typically happens is these scammers actually get someone else's account, they get access to that account, so you're sending it to someone who doesn't even know that they're being scammed as part of this, and then, as soon as that money clears, they transferred out of that account and into their own, and that's the key is that you think that it's going to a reputable bank. It's not some kind of overseas bank or anything like that, and so it seems very legitimate Now to protect yourself against escrow wire fraud. Here's a couple points Always verify wire instructions. Call your agent or the closing attorney at a known phone number, not one that was provided in the most recent email to confirm instructions. I usually like to say whatever email you used for your earnest money, that's a great one to hold on to and compare with the more up to date one. Make sure that everything matches, because you're going to send that money and escrow company, the title company, your agent everyone is verifying that that went through. And if it does go through and they see it in there, then you know that that's being sent to the right place. If you see that account number or any information is different between those two emails that earnest money email and where to send your closing costs and your deposit that's going to be a big red flag. So that's the next one. Be wary of any changes to the payment instructions, especially last minute changes. That's a big red flag. Be cautious with email. Don't click any links or download attachments from an unknown sender. Make sure you secure your email account. Use strong passwords. If you can use two factor authentication whenever possible, you don't want someone getting access to your account and having access to everything. Now, if you become a victim, you need to report it immediately, contact your bank, your real estate professional and your local law enforcement by understanding the methods used by scammers and escrowire fraud, and taking some of these preventative measures, first-time home buyers, can significantly reduce your chances of falling victim to this incredibly expensive scam.

Speaker 1: 12:46

This next one is interesting. It's a home improvement scam and as a first-time home buyer, you may not have really been involved in a lot of these. These scams involve scammers pretending to be skilled contractors. They'll win over homeowners with promises of renovations or repairs, asking for a hefty upfront payment. However, after receiving the payment, they either disappear or deliver subpar work, leaving the homeowner out of pocket and with unfinished work. As a first-time home buyer, oftentimes maybe you're buying a house and you want to do some remodeling work, and that is why they target first-time home buyers, because you haven't had as much experience typically working with home improvement contractors. So here's a little bit more detailed breakdown of how this process works.

Speaker 1: 13:30

The initial contact the scammers posing as a contractor may approach the homeowner with an attractive offer for home improvement services. They could claim to have just finished a job in the neighborhood and offer a discounted rate due to leftover materials, project estimate and contract. The scammer provides a seemingly professional assessment for the project. Presenting themselves as experienced and knowledgeable, they may pressure the homeowner to make a hasty decision to secure this exclusive deal, request for upfront payment. At this stage, the scammer asks for substantial upfront payment, supposedly to cover the cost of materials and initial labor. They might push for a payment method that's difficult to trace or recover, such as cash Abandoning or standard work. After pocketing the payment, the scammer may simply vanish without commencing any work. Alternatively, they may perform shoddy rushed work using cheap materials or just leaving the job incomplete.

Speaker 1: 14:32

How do you protect yourself against home improvement scams? Okay, as a first-time home buyer, always verify the contractors credentials and ask for references. Be cautious of contractors who make solicited approaches or offer deals that seem just too good to be true. Never pay the full amount upfront. A legitimate contractor will typically agree to a payment scheduled aligned with the completion of specific stages of the project. Avoid contractors who pressure you into making quick decisions or insist on cash payments. Insist on a comprehensive written contract that outlines the scope of work, cost and timeline, and opt for payment methods that provide some form of protection, such as a credit card or check rather than cash, or, especially, wire transfers.

Speaker 1: 15:24

Now, when it comes to deposits, the standard deposit for home improvement work can vary widely based on the size and the nature of the project, even the contractors, policies and local laws and regulations. However, a general rule of thumb often suggests that the deposit should not exceed 20 to 30 percent of the total estimated project cost. This initial payment is typically used to cover the cost of materials and the start of work. For large or long-term projects, it's common to use a payment schedule or draw system where payments are made at various stages of completion. This could be after certain milestones are met, like after the completion of framing or electrical work, or regular intervals such as every two weeks or monthly. The final payment should ideally be withheld until the job is fully completed and the work's been inspected and approved. In some regions there are laws that limit the size of a deposit that a contractor can legally request. For example, here in California, a down payment before work starts is not supposed to exceed a thousand dollars or ten percent of the contract price, which ever is less. Always make sure to thoroughly vet your contractor and get a written contract that clearly outlines the payment schedule and work to be performed. You should verify their license on public sites to ensure that they're fully bonded, licensed and insured.

Speaker 1: 16:48

The next one here is dual agency. It's not technically a scam or fraudulent, but it's something I wanted to bring up. Dual agency can certainly create a conflict of interest that may not be in the best interest of the buyer's seller. In a dual agency situation, the real estate agent represents both the buyer and the seller in the same transaction. The challenge here is the agent's ability to advocate for the best interests of both parties equally. So in a little bit more detail, dual representation.

Speaker 1: 17:19

In a typical real estate transaction, you have the buyer and the seller having their own agents who represent their own interests and negotiate on their behalf. In a dual agency scenario, a single agent or two agents from the same brokerage represent both the buyer and the seller. This can make it difficult for the agent to negotiate the best terms for both parties. As these interests often conflict, you get some potential conflicts of interest. The primary issue with dual agency is the potential conflict of interest. The agent may find it challenging to negotiate the highest price for the seller while also trying to secure the lowest price for the buyer. Issues related to repairs and closing timelines can also become problematic. It is illegal in some other states due to the inherent conflict of interest, so it's illegal in some states and legal in others, and that should give you a bit of an idea as to why this may not be the ideal situation for you Now to navigate a dual agency situation. Buyers and sellers should ensure that they're fully understanding the implications and potential risks of a dual agency agreement. Consider seeking independent advice, such as hiring an attorney to review contracts or negotiations. Communicate openly with your agent and feel very comfortable asking questions about the process, and you should know, as a buyer, that you have the right to seek separate representation if you feel that the interests are not fully protected in a dual agency situation. So again, dual agency isn't necessarily a scam, but it requires both parties to be fully informed and comfortable with the arrangement. It's essential to remember that buyers and sellers have the right to representation that fully advocates for their interest.

Speaker 1: 19:02

All right, the next one is a lending one. This is predatory lending. This unethical practice involves lenders exploiting borrowers through deceitful, unfair or high-cost loan terms. Often, predatory lenders target those with poorer credit scores, low income or limited financial literacy, who may struggle to secure loans elsewhere. The main concern is that these loans can lead to severe financial hardship due to unreasonable interest rates, hidden fees and sometimes even very severe penalties. Here's a more in-depth look at the practice. The first one here is targeting vulnerable borrowers. Predatory lenders typically focus those who have had difficulty obtaining loans through conventional lenders due to poor credit scores, income or a limited understanding of the financial system. Two unfair loan terms. Predatory lenders often involve exorbitant interest rates or hidden fees that aren't adequately disclosed or explained to the borrower. These terms can make the loan significantly more expensive than the borrower initially realizes. Three lack of transparency. Predatory lenders often use confusing language amid important details or misrepresent the terms of the loan to trick the borrower into agreeing to unfavorable terms.

Speaker 1: 20:22

What can you do to guard against predatory lending? If you're a first-time home buyer, you should thoroughly research lenders, check the reputation and their credentials. Be cautious of offers that seem too good to be true or that you get pushed to make a hasty decision. Seek professional advice when necessary, such as consulting with a financial advisor or a lawyer. Fully understand all loan terms, including interest rates, fees and penalties, before signing any loan agreement, and you may also want to look into other low-cost options designed for lower income or credit challenged borrowers. There may be government whether that's local or national programs that you can utilize that aren't high-cost.

Speaker 1: 21:06

This next one is mostly when you're buying a home and the seller has hidden defects or maybe leans. This scam typically involves a seller who doesn't disclose or they intentionally hide significant defects or leans on the property. Hidden defects can refer to serious structural, mechanical or environmental problems with the property. This can include foundation issues, electrical plumbing, mold, roofing all of these things which the seller intentionally emits from the disclosure. A dishonest seller might attempt to cover these problems with cosmetic fixes or by remaining silent on their existence. They can often put things like large boxes or furniture in front of the defect during a viewing to hide it. This is why it's important to ensure that you do a thorough walkthrough prior to closing on the home and do not sign off on the home until you've been able to see it without any obstructions.

Speaker 1: 22:03

Now liens, on the other hand, are legal claims or encumbrances on a property that act as a security for a debt or an obligation that the homeowner owes. If there's an undisclosed lien on the property, this could transfer over to the new owner after the sale, leaving the unsuspecting buyer responsible for the outstanding debt. These can be tax liens, mechanics liens or judgment liens that weren't addressed or disclosed before the sale. So how do you protect yourself? To shield yourself from these kinds of potential issues, you should always opt for a very comprehensive independent home inspection, conducted by a certified professional, before purchasing. This inspection should cover everything from the foundation to the roof. For liens, a thorough title search is crucial. This won't cover any outstanding liens or claims on the property. Buyers should also insist on written seller's disclosures, where the seller must document any known issues with the property.

Speaker 1: 23:04

And the last one is overpriced listing scams. In this scam, a property is intentionally listed for sale at a price significantly higher than its actual market value. This is done with the intention of duping inexperienced buyers or those who haven't done their due diligence into overpaying. So the seller engaging in this scam may employ high pressure sales tactics to induce the buyer into making a quick, ill-informed decision. They might also misrepresent the local market conditions, potential rental income or projected appreciation rates to justify the excessive asking price. Some indicators of this are an inflated asking price may not be immediately obvious, especially in hot real estate markets. However, certain signs can suggest an overpriced listing scam. These include a price substantially higher than comparable properties in the area. A price that hasn't been adjusted, despite being on the market for a long time, or an owner insisting on setting a specific, non-negotiable price without reasonable justification.

Speaker 1: 24:10

What are your protections for this? As a first-time home buyer, you can protect yourself by researching recent comparable sales in the area and understanding the local market conditions. Getting an independent property appraisal is also crucial, as it provides an unbiased estimate of the property's worth. If the asking price is significantly higher than the appraisal value, that's a huge red flag. Do not waive any kind of appraisal, even if your lender says that's something you might be able to do. I still highly recommend it, even in a completely cash transaction. Having an experienced, trustworthy real estate agent can be invaluable in these situations. They can provide insights into the fair market value of homes in the area and guide you throughout the process and negotiate on your behalf.

Speaker 1: 25:03

Now there are many other scams, and oftentimes they're going to be related to an absent or out-of-area owner. Sometimes they'll be ill or they can't travel or they're on extended vacations so you can't see the house. Sometimes that room oh, we can't show that room because someone's in there and we can't open it up for tours. If you are from out of the area and moving across countries, probably worth your while to spend that extra money, meet in person, walk through and ensure the home is completely legitimate. Before moving everything, really make sure you've done your due diligence. Also, one of the biggest red flags we see when someone asks to move the conversation to WhatsApp, it's nearly a tell tale that it's a scam. Another is asking for you to wire money, especially with something like Money Gram, or giving gift card numbers over the phone is another huge sign of a scam.

Speaker 1: 25:57

That wraps up today's episode for the first time homebuyer podcast. We hope you found this information here valuable and empowers you as you embark on your home buying journey and gives you the information to make sure that you don't fall victim to any of these scams, because, remember, knowledge is your greatest defense against scams. So stay vigilant and always trust your instincts. If you have any questions or need further assistance, don't hesitate to reach out to a trusted real estate professional advisor. We're also available here on our website, fthbprosecom. We've got all of our podcast episodes, articles, tools and resources to help make you a more informed homebuyer. If you liked this episode or any of the others, please feel free to give a review or share it. We'd love that. Thanks, and happy homebuying.