The crime of real estate fraud occurs when one party to a real estate transaction falsely represents relevant information to the other party. The other party then acts on the false information, to their financial detriment.
Real estate fraud occurs in many contexts, including the closing (sale or purchase) on a piece of real property, and the mortgage application or approval process. Real estate fraud may be punishable by time in jail and/or monetary fines.
What are the Elements of Real Estate Fraud?
To prove real estate fraud, the prosecution must demonstrate the following:
- One party makes a misstatement, or omitted a material (relevant) fact to the other;
- The party making the misstatement or omission intends to commit fraud;
- The other party relies upon the misstatement in making a decision, such as a decision to approve a loan or to purchase a home; and
- The other party, as a result of that reliance, incurs financial loss.
A loss must be shown. Even the lost chance to purchase a home could be considered a financial loss, depending on the circumstances.
When Does a Buyer Commit Real Estate Fraud?
Commonly, buyers take out a loan to finance the purchase of real property. This loan is known as a mortgage loan. The loan application is evaluated by a lender, which is typically a bank. When a buyer applies for a loan, the buyer may make any number of false representations on the application. These include:
- Providing a credit score that is higher than the buyer’s actual credit score;
- Providing an income figure than the buyer’s actual income;
- Misrepresenting the amount and types of debts the borrower owes to various creditors; and
- Submitting falsified paycheck stubs or statements, or falsified tax statements.
Additional types of buyer fraud include:
- Using a Stolen Identity: Here, the buyer obtains a stolen identity by committing the crime of identity theft. The buyer then uses the name, credit history, and other information of the person whose identity was stolen, on the application documents.
- Using a So-Called “Straw-Buyer”: Here, the borrower uses an agent, sometimes called a nominee, to fill out the application, The application is made in the name of the agent, and contains the credit history, income details, and other financial information about the agent, not the buyer.
- Using a “Silent Second”: In this type of real estate fraud, the buyer is unable to afford the initial or down payment the mortgage loan company requires them to make. The buyer, without the lender’s knowledge or approval, obtains a second mortgage from a different lender to finance that down payment.
- A lender usually requires the buyer to completely disclose all sources of funds the buyer will use for the down payment. When a buyer does not reveal the identity of the lender who is financing the down payment, the buyer commits fraud by failing to disclose a relevant fact.
A buyer also commits real estate fraud when the buyer intentionally misrepresents or omits a relevant fact during the closing process. If that misrepresentation or omission causes the seller to go ahead with the sale, when disclosure of the “true facts” would have caused the seller to not go through with the transaction, then the buyer has committed fraud.
When Does a Seller Commit Real Estate Fraud?
Sellers can commit real estate fraud before or during the closing process. If a seller makes an intentional misrepresentation of fact or omission to a buyer about the seller’s house, that the buyer relies on in making the purchase, then the seller has committed fraud.
For example, a seller may know of a serious defect in the property. The defect is one that is not apparent. The buyer is unlikely to discover it upon ordinary inspection. If the buyer purchases the house in reliance upon the seller’s false representations, then the seller has committed real estate fraud.
When Does a Lender Commit Fraud?
Lenders and real estate brokers frequently commit what is known as appraisal fraud. Mortgage loan officers as well as real estate brokers and agents typically are paid on a commission basis. This means these individuals receive, as income, a percentage of the price a home ends up selling for.
With appraisal fraud, the lender, agent, and sometimes the appraiser, work together to deliberately inflate the value of the purchase price. They do so in the hopes of receiving a higher commission. If a buyer, relying on the inflated price, purchases the home, then the entities who inflated the home value have each committed real estate fraud.
What are the Penalties for Committing Real Estate Fraud?
The crime of real estate fraud may be prosecuted as a misdemeanor or a felony, depending upon the severity of the crime. A misdemeanor is punishable by up to a year in prison, and/or monetary fines.
A felony is punishable by a prison sentence of one year or more, as well as payment of monetary penalties. The crime of mortgage fraud is an offense both under state law and federal law. In general, a sentence for the federal crime is harsher than an equivalent state sentence.
Do I Need the Help of a Lawyer if I Have Been Charged With Real Estate Fraud?
If you have been charged with the crime of real estate fraud, then you should contact a criminal attorney. This attorney can explain the charges. The attorney can also advise you as to your rights and options. The attorney can represent you at hearings and in court.