How To Avoid Real Estate Scams

Agent showing house

If you are in the market to buy or sell a house, refinance your mortgage, or if you are considering investing in the real estate world, beware-there are scams out there that the smartest of people fall for.  Here some of the classic real estate scams and tips on how to avoid them.

  1. Who is the ideal Con Artist?  The most savvy of con artists are those who have already attained some level of trust in your life.  People you deal with daily, even family members, prove the most successful of con artists.  When we "go along with others" our brains' defense mechanisms soften, and our skepticism is reduced.  Con artists use this neurological trick to get you. It is ok to place trust your friends, family, and co-workers, but be skeptical about any business pitches they may give you.  Always seek the advice of two or more financial advisors or confidants before proceeding.
  2. Overseas Investment and Return.  Con artists who utilize this real estate scam play on a victim's deepest desire-getting something for little-an easy investment.  These schemes are usually Ponzi Schemes, meaning con artists collect money from many victims, and disperse smaller amounts out to these same people from the same pool of money and claim it is "profit".  In this model, investors are told to send investment checks, and they are giving small checks in return, supposedly "proving" the system works.  In realty they are receiving a small chunk of change from another "investor" who has also fallen for this plot.  People tend to fall for the overseas angle because it is exotic-sounding and they think they are, in some way, taking advantage of a new discovery or resource others are not aware of.
    • Defense:  Ask yourself the simple question, "Is this too good to be true?"  Examine the business model thoroughly to determine whether the model could actually work.  If you have never invested in real estate before, it is a good idea to start local, not abroad.
  3. Local Investment Scam.  People are caught more off-guard when con artists use familiar landmarks or names.  For instance, if someone calls you out of the blue to invest in a building across the world, it may raise your eyebrows.  However, if the building is the very building you pass by on your morning commute, it may be more believable.  Similar to investing in overseas real estate, you should be wary of anything that sounds too good to be true.
    • Defense: Always investigate beyond the surface.  Go to the site. Ask your contact person for a letter of credentials and show the document to officials at the building site. If they have never heard of this investment company, chances are, you were almost duped.
  4. Internet Advance Fee Fraud.  In this real estate scam the individuals doing the trickery will ask for a downpayment in order to get you your return.  They will ask you to wire a small amount of money to "free" up channels that will ultiamtely return profits from a commercial or residential project.  These scam artists simply collect a few dollars from hundreds and thousands of people-giving them a hefty and easy profit.
    • Defense:  Never wire money over the Internet. 
  5. Title Fraud.  In this scheme the con artist steals a home owner's identity and is thus able to take title of the home.  In some cases, mortgages have been drawn against properties without the knowledge of the actual homeowner.

    • Defense:  Visit Protect Your Title, where you can find tips on guarding your privacy and home. Always be cautious against giving your social security number out as well as other private information.
  6. Home Equity Stripping.  Home equity stripping occurs when a lender says its okay to exaggerate your personal wealth.  They approve you for an amount you cannot afford and then strip you of it.  They can take your home and more for non-payment.
    • Defense:  Do not continue with the loan if the lender implies that you can embellish on your application.
  7. Home Equity Flipping.  This when a lender encourages you to repeatedly refinance your loans at what they say are better rates each time, only to nail you with additional fees and interest for each new loan.  This scam takes a longer time to show itself and can be hard to detect since the lender leads you to believe that each loan refinance is the smartest and least expensive move.  Since the interest and debt will keep adding up, eventually this scam can result in you losing your home. 
    • Defense:Make sure you know what the rates and fees are when you refinance.
  8. Home Improvement Scam.  A typical scam with contractors is when they tell the homeowner that they can find a lender who will help them finance a project when the homeowner cannot afford it on their own.  The contractor and a lender he knows offer a financing plan and make the homeowner quickly sign papers.  In reality these papers are for a home equity loan with high rates-rates that you are now required to pay off.  The contractor will most likely do a poor job on the project and you may be stuck with high payments on a poorly-constructed home.

    Defense: Work only with contractors you trust and who have good reputations.

All of the above are typical real estate scams, but this list is not all-inclusive. 

Always remember that while it's true that any investment is a risk, taking risks does not always translate into profit.  Always examine the underlying business model your contact is presenting and ask yourself (and other people you trust) if it makes sense.  If you think it is too good to be true, it probably is.

 

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