Real estate fraud occurs when a borrower misrepresents information to obtain a loan they are not entitled to. This can include altering pay stubs or obtaining false letters of credit. More complex forms include illegal flipping of properties and fake appraisals. Lenders conduct investigations to reduce the risk of fraud and the public should report any suspicions to law enforcement or real estate agencies.
Real estate fraud is a form of real estate fraud in which a borrower misrepresents information in order to access a loan for which they would not normally be entitled. Borrowers may use a variety of tactics and are sometimes led into fraudulent activities by financial advisors who behave inappropriately. Measures to combat real estate fraud include retaining investigators in high-fraud areas, requiring lenders to review applications, and encouraging the public to report fraud to a government agency. Agencies dealing with housing and fraud can usually accept reports from members of the public.
In a simple example of real estate fraud, a borrower could misreport income or assets for a large loan or a loan with better terms. The borrower could alter pay stubs, move money to make it appear he has more assets, or obtain false letters of credit proving his creditworthiness. This can be facilitated by applying for a low-documentation loan, where the borrower can be allowed to declare income without providing proof. This makes it very easy to lie to get a better loan.
More complex forms of real estate fraud can include the illegal flipping of properties and fake appraisals. In this business, the borrower buys the property, sells it quickly, and buys a new piece of property. Flipping isn’t inherently illegal, but it becomes so when it’s based on false information, such as an artificially inflated valuation made to make the transaction more profitable. Likewise, borrowers can use a fake appraisal report to qualify for a loan that is worth more than the property.
Buyers who commit real estate fraud may do so with the best of intentions; want to buy a property and intend to repay their loans in full and meet the terms. However, it poses a risk to lenders, as the borrower may be exposed to a higher default risk and the lender will have to initiate collection proceedings if the borrower defaults on the loan. Lenders may want to be able to charge higher interest in such settings in order to protect themselves. Real estate fraud can unfairly enrich the borrower at the expense of a lender, which may be grounds for a lawsuit.
Lenders conduct careful surveys of buyers to reduce the risk of fraud. The investigation may include background checks, inquiries for credit information, and other measures to verify identity and authenticate any statements made by the borrower. Members of the public, including real estate agents, who have knowledge of real estate fraud should report it to law enforcement or the real estate agency. The agency can check the situation to determine if fraud is taking place and can take further steps to address the matter.
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