The crime of real estate fraud occurs when one person in a real estate transaction makes false representations of relevant information to another person in the transaction. Or, the person may fail to disclose relevant information to the other. The other person then acts on the false information or omission to their financial detriment.
Fraud in real estate transactions can take place in any phase of a real estate transaction from the mortgage application or approval phase through the closing of a sale or purchase of a piece of real property, Prospective renters can also be the victims of real estate fraud. The crime of real estate fraud may be punishable by time in jail or prison and the imposition of a fine.
What Are Some Common Types of Real Estate Fraud?
Real estate fraud cases can arise from any kind of transactions that involve the buying, selling, renting and renovation of real property. Some perpetrators engage in fraudulently selling a house. A seller can make false statements to a buyer about a property they are selling. Or, a seller can fail to tell a prospective buyer an important fact about the condition of the property they are selling in order to make the sale..
Buyers can make fraudulent statements to a mortgage lender in order to qualify for a loan. Real estate agents and brokers can make false statements, hide known defects or try to inflate the price of properties.
Even renters can be victimized by fraud. A prospective landlord can fail to disclose defects about a rental property. A prospective tenant can make false representation to qualify to rent a property. Any aspect of real estate transactions can give rise to fraud.
What are the Elements of Real Estate Fraud?
The elements of real estate fraud that must be proven by the evidence for the prosecution to obtain a conviction are:
- A person made a misstatement, or failed to communicate a material (relevant) fact to another party to a real estate transaction;
- The party making the misstatement or omission intended to commit fraud;
- The other party relied 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, suffered a financial loss.
A loss must be shown. Paying far more for a property or giving someone money and getting nothing in return for it can be losses suffered because of real estate fraud.
When Does a Buyer Commit Real Estate Fraud?
It is common for home buyers to take out a loan to finance the purchase of real property. This loan is known as a mortgage loan. The loan application is analyzed by a mortgage lender, which can be a bank or credit union. When a buyer applies for a loan, the buyer may make any number of false representations on the loan application in order to improve their chances of getting a loan. These include:
- Attempting to report a credit score that is higher than the buyer’s real credit score;
- Providing an income figure that is higher than the buyer’s actual income;
- Falsely representing the amount of debt or the kinds of debts the borrower owes to creditors creditors; and
- Giving the lender false paycheck stubs or statements, or false tax statements.
Additional types of buyer fraud include:
- Buying with a Stolen Identity: Here, the buyer commits identity theft and then uses the stolen name, credit history, and other information of the person whose identity was stolen on the loan application;
- Using a So-Called “Straw-Buyer”: Here, the borrower applies for a loan with information that belongs to another person, the so-called “straw buyer”. The buyer might even use the name of the “straw buyer” instead of their own name; this differs from buying with a stolen identity because the “straw buyer” is part of the fraud and allows use of their information;
- Using a “Silent Second”: In this type of real estate fraud, the buyer is unable to afford the down payment that must be paid when buying a home. Without the lender’s knowledge or approval, a buyer might get a second mortgage from a different lender to finance the down payment.
- A lender usually requires the buyer to report the source of the funds the buyer will use for the down payment. When a buyer does not report the source of a down payment truthfully the buyer commits fraud by failing to disclose a relevant fact.
When a buyer intentionally misrepresents or omits a relevant fact when a purchase is finalized, the buyer commits another form of real estate fraud. If that misrepresentation or omission causes the seller to go forward with the sale, when disclosure of the truth would have caused the seller not to 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 at any point in the process of selling property. If a seller intentionally misrepresents a fact or fails to disclose known facts that are relevant to a buyer about the seller’s house, and the buyer relies on the misrepresentation or omission, then the seller has committed fraud.
For example, a seller may know that the property has a serious defect. The defect is one that is not apparent. The buyer is unlikely to discover it through an ordinary inspection. If the buyer relies on the seller’s failure to report the defect and purchases the house, then the seller has committed real estate fraud.
When Does a Lender Commit Fraud?
Lenders and real estate brokers commit a type of fraud known as appraisal fraud. Mortgage loan officers as well as real estate brokers and agents are paid a commission for their work. This means that they receive a percentage of the price for which a home sells. So, lenders, brokers and agents may be motivated to see that a buyer qualifies for a loan in the highest possible amount.
In appraisal fraud, the real estate agent or broker, possibly the loan broker, and the appraiser, work together to deliberately inflate the value of the purchase price. They do this in order to increase their own commissions. If a buyer, relying on the inflated price, purchases the home, then the parties to the inflation of the value have each committed real estate fraud.
Mortgage-loan lending can give rise to other types of real estate fraud. If a homeowner with a mortgage stops making the required payments, the mortgage goes into a process known as foreclosure, in which the lender of the mortgage attempts to take possession of the house from the homeowner.
There are perpetrators of fraud who try to prey on people trying to save their homes from foreclosure. They may falsely represent themselves as having the ability to stop the foreclosure by taking over the loan. They promise to rent the house to the homeowner who, in time, will be able to get the home back. These perpetrators take money from the homeowner and then disappear; the homeowner remains in default on their mortgage and remains at risk of losing their home.
Another scam is to offer the homeowner refinancing on the mortgage loan. The problem is that the terms of the loan are so unfavorable to the homeowner that they will never be able to pay it off.
People looking for rental housing can also be victimized by fraud. A perpetrator shows them a rental, collects the security deposit and the first and last month’s rent and disappears. The prospective renter is left to discover that the perpetrator did not have any property to rent at all.
What are the Penalties for Committing Real Estate Fraud?
The crime of real estate fraud may be charged as a misdemeanor or a felony, depending upon the severity of the crime and the law of the state in which the fraud is committed. 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 a more substantial fine.
Real estate fraud can also be charged as a federal crime by federal authorities in some circumstances. It might lead to charges of bank fraud or wire fraud under federal law which could lead to a lengthy term of imprisonment in a federal penitentiary.
Making false statements on loan and credit applications can be a federal crime punishable by up to 30 years in prison and a fine of up to $1 million. Other federal charges that could be brought against a perpetrator involved in identity theft, aggravated identity theft and fraud in relation to records of title to property.
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 fraud lawyer. The attorney can explain the charges against you, advise you of your rights and your options. The attorney can represent you at hearings and in court.
The statute of limitations (filing deadline) for real estate fraud varies from state to state because the crime is governed by state law. In most states, fraud charges must be brought within one to five years after the crime occurred.
Fraud may be charged as a federal crime as well. An experienced criminal defense attorney will know what statute of limitations applies to the crime with which you have been charged, whether state or federal.
The potential charges could result in very serious punishment if you are convicted, so you most definitely want an experienced criminal defense attorney to represent you if you have been charged with real estate fraud.