by Tod Snodgrass
History is replete with (in)famous real estate scams. In the 1920s in Florida for example, charlatans sold millions of dollars worth of swamp land that was literally under water and basically worthless. Today, the scams are normally more sophisticated, but can still be very damaging to your wallet. Real estate transactions, and particularly those involving Real Estate Investors (REIers), are inherently complex. What follows are four problematic areas to beware of and cautious about.
A. Letter of Credit (LOC)
Recently, a new crop of scammers have been peddling LOCs for use as collateral for the purchase of real estate. The problem is that legitimate LOCs are normally not sold, offered as investments, or used as collateral. Real LOCs are typically issued by banks to ensure payment for goods shipped in connection with international trade, and have no connection to real estate investments. LOC frauds can occur when a con artist offers a “Letter Of Credit” or “bank guarantee” as collateral for a property purchase. NOTE: Equally useless, to REIers, are SBLCs (Stand By Letters of Credit). FYI: Many of these frauds stem from supposed overseas financial institutions or governmental agencies. Smart REIers should be careful with LOCs/SBLOCs, especially if they are being used as collateral for real estate deals.
B. Realtor Assigning a Sale to Themselves
This can occur when a shady realtor takes advantage of a real estate investment buyer. For example, after the purchase contract is signed by all parties, but before the deal closes, the buyer experiences some form of financial distress. The buying broker coerces the buyer into assigning the deal to her for a substantially discounted price, because the buying broker has convinced the buyer that he would have difficulty keeping the financing from the bank (due to his recent financial reverses). If in doubt, you should consult legal counsel about how to handle the above problem. The good news is that the vast majority of realtors are straight shooters and would never engage in such questionable behavior.
C. Forfeited earnest money deposit funds
The danger for inexperienced REIers is that there are a few shady characters in this business who take advantage of naïve REI buyers as regards the refundability of earnest money deposit monies. And in that regard, it is a form of scamming. To buy real estate, most purchase contracts contain verbiage which requires you to provide an earnest money deposit into escrow, typically equivalent to 1%-3% of the purchase price. Assuming escrow closes OK, the earnest money is usually applied towards the purchase price of the property. However, if the buyer pulls out of the deal for a reason that isn’t allowed under the contract, they forfeit the deposit. Every year, by some estimates, buyers lose millions of dollars in forfeited deposit money because they did not understand the fine print. The way for REIers to avoid forfeiting deposit money is to include verbiage in your initial offer that protects you from such a potential negative outcome. Consult a real estate attorney for advice if you have any doubt at all about an offer you are about to make.
D. Fraudulent Wire Transfers
Real estate con men and/or hackers have been known to target realtors, closing attorneys and escrow providers. The scam often begins with what appears to be a legitimate email communication from a party involved in a current real estate transaction, touching on the subject of wire transfer instructions, i.e. which account to send the funds to. What you and others do not know is that a con artist has hacked into the email account; he has watched the email traffic and eventually sends an instruction to wire the funds to his (illicit) account rather than the actual valid account. Once the funds are successfully wired to the illicit account, the criminal tests the transaction, by sending a token percentage (of the total amount of money), via a wire transfer to another bank in which the fraudster has a second illicit account. If the small amount transfers successfully, the remaining balance of funds are then transferred to the other bank. Usually 100% of the illicitly transferred money disappears within a day or two. To counter such scams, a process needs to be set up to prevent such problems from occurring in the first place:
1. If wire transfer instructions are to be emailed, be sure the wiring info is NOT in the body of the email itself, but instead should be included inside of a PDF, as an attachment to the email.
2. Use a password provided via USPS, over the telephone or in person.
3. Before wiring the funds, first call the legitimate potential recipient and confirm the wiring instruction(s) information via telephone.
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