Closing Day feels like going to Carowinds for most people, and for good reason! Buying a house is incredibly exciting for obvious reasons. Finally, you get the living room you can’t wait to relax in, the beautiful kitchen that makes cooking feel more like a hobby than a chore, and finally your own closet too in the primary bedroom! Seeing the joy and excitement that buyers get when closing on the perfect home is truly my favorite part of my job.
But if there is one thing that will replace that excitement with anger, sadness, and fear- it is being fooled by a scammer.
Scammers are getting better and better, so it’s more important than ever for consumers to be educated and ready to recognize and prevent these scams from ever happening. The closing table isn’t the only place where real estate scams can occur, so keep reading to learn how you can constantly be protecting yourself!
1. Wire Transfer Fraud
Wiring funds is growing in popularity with closing attorneys as a way to finance real estate transactions. However, this electronic payment system does have one flaw: the opportunity for scammers to creep in.
Here is how it works: you get a email (or sometimes a call) from someone who doesn’t feel like working for money and would rather just take yours instead. There are a few ways they can get this contact information and know the right time to call or email you. Oftentimes if an agent or attorneys email has been hacked the scammer can get your contact info that way.
Once they have your info and closing is near, they will create an email address that is similar to your attorneys or lender- often off by just one letter so it’s hard to notice at first glance.
When they reach out to you, pretending to be your closing attorney, they will provide you instructions on how to wire the funds necessary for closing. But as you can guess, they are providing instructions on how to wire it to them- NOT to your actual closing attorney.
Once you get next call with wire instructions, you will realize that the first one was indeed a scammer. Unfortunately at this point they have already withdrawn your money from an overseas bank account and are using it on mojitos on the shore. Sometimes you will be able to get the money back, and I really hope you are able to. Not everyone is lucky enough to get that money back, and in addition to losing that money, they also lose the house they loved, and their deposits.
How to prevent: When it is approaching time to wire the funds and you receive a call or email from your “attorney” (hopefully the real one and not a scammer), call them back at a verified number you have used before and ask for instructions over the phone, or have them confirm that they did indeed send you the email so you know it was not sent from a third party. Do not click any links in emails until you have verified it is trustable.
Many attorneys will also send you warnings early into the relationship of working with you. Reference this warning and instructions closer to closing day.
2. Longterm Lockout Agreements
When you list your property for sale, the goal is to receive as many offers as possible so that you can select the best one possible.
When you are working without the assistance of a REALTOR, it may be tempting to assume all offers are the same, and pick the one with the highest purchase price and deposit amounts. Unfortunately, sometimes buyers who are not represented by a REALTOR will try to sneak a clause into the contract that only has their best interest at mind.
The standard Offer to Purchase form is 16 pages- so it isn’t exactly difficult to sneak something into it if the receiving party isn’t used to reviewing them. Some buyers have been using a trick called a lockout clause. A lockout clause may vary in wording, but they all essentially do the same thing- they restrict the seller from negotiating or accepting offers with any other buyer for long periods of time. The buyer still has the option to buy, but at their own leisure since the seller has no other options. They will then try to renegotiate with the seller, since the seller doesn’t have any other options. These types of scams work best on sellers who are looking to sell fast or are in financial troubles.
It is important to note that even if both parties are assisted by REALTORS and have a standard closing process, there is still something similar to a lockout clause. A due diligence period is a short period of time that the buyer pays for to be able to conduct inspections and obtain financing. The seller is contractually restricted from accepting other offers during this period as well. The difference is that these are for short periods of time- just long enough for the buyer to determine they are willing and able to proceed with the purchase- and the buyer compensates the seller for this time period with a due diligence fee.
How to prevent: The best way to prevent this scam is to work with a diligent real estate professional who will review the offers for you and advise you on the favorable terms- and warn you about the other ones. The other option is to review each offer line by line to make sure nothing was snuck into it.
3. Untruthful Wholesalers
First I want to be clear that not all wholesalers are scammers, and wholesaling itself is not a scam. It certainly can be, however, when done untruthfully.
The debate about if this is actually a scam or not is the reason it is not ranked first on this list. While it is the most common “scam” on the list, it is a perfectly legal process using loopholes in the law.
Here is how it works: an “investor” approaches you regarding a property you own but do not occupy, or possibly even your primary residence. They tell you they are interested in buying your home, and if they can’t, then one of their “business partners” will. Once they get your property under contract, instead of having any actual intent to purchase it, they turn around and search for buyers who they can sell it to.
Once they find a buyer, they mark the price up significantly. The owner gets the price the wholesaler told them, the buyer gets the house, and the wholesaler keeps the difference.
What are the cons? What is the big deal? On a surface level, it seems fine and dandy. Once you have seen the process a few times, you realize that it is a flawed system, and often leaves consumers hurt in the end.
The primary issue is that it is untruthful to the owners. If it was truthful, it would not work for the wholesalers. Let’s think about it: if the wholesaler would tell the owner that they are actually going to try and wholesale it, the owners wouldn’t be deceived when they sign the offer, and I would have no issue with the practice. But they lie to the sellers and say they will buy it, or their partner. So why do they lie about buying it when they are actually going to try to find a buyer for it?
Well, why would anyone choose a wholesaler to sell their home when they could hire a REALTOR? A REALTOR has legal fiduciary duties to the seller, they must keep the sellers interest above their own. They must advise the owner about the truthful value of their home and how much they will charge the owners to sell it. They are knowledgable and experienced, and help the seller market their home so it can sell for top dollar. Everything a REALTOR does is governed by rules set in place to protect both the buyers and sellers in a transaction.
A wholesaler, on the other hand, keeps their own interests top of mind. They lie to the seller about the value of their home. They pick one of two lies to use, depending on if there is any competition. If they know they are the only buyer you have, they lowball you so they can pocket the most money possible (much more than a REALTOR). If they are not the only buyer, they give you an exaggerated price just so that you sign their agreement.
Once they have the property under contract, there is a lockout clause- so you can’t terminate the offer or sell it to someone else when you realize they have fooled you. There is no Association of Wholesalers that you can complain to when they have had your property under contract for months. They do not have any liability for empty promises made.
Pause: So how is this legal? After all, a real estate license is required to sell real estate of any kind in North Carolina, so how are they able to find buyers and sell it to them?
Because they are not selling the real estate to them. Rather, they are selling the signed offer to purchase. Yes, instead of selling the house, they are selling the right to buy the house. It is essentially the same thing, which is why it is a loophole that they use.
To summarize, wholesaling is not a scam. What is a scam is lying to homeowners and taking advantage of them for financial gain.
How to prevent: The best way to prevent this is to be aware of it. The wholesaling practice is becoming more and more popular. There are all kinds of YouTube videos and webinars that teach people this practice. If you receive a call, email, or postcard from someone claiming to be an investor, you should be alert about the possibility of them being a wholesaler. If they say “my business partner or I will purchase it” that is a dead giveaway.
In most situations, listing with a REALTOR is the best option for homeowners because of all the fiduciary duties we must follow. Listing with an agent is also the best way to guarantee you get top dollar. Also, I hope this post doesn’t encourage you to paint investors with the same brush as untruthful wholesalers. I have seen lots of honest investors and I don’t post this to discredit them. Sure, they won’t give you top dollar, but they will help you sell in a short time period without the stress of putting your home on the market, if that is a concern of yours.
4. Loan Flipping
Loan flipping is when an untruthful lender convinces homeowners to refinance their home time and time again. The lender charges high fees every time, and the buyer is left with higher mortgage payments and less equity.
Predatory lenders often target older individuals who could suffer from memory loss, as these individuals often have more equity in the home to pull from. Lenders convince the owners over and over again that they could use money from the refinance to fix the house and make it more suitable and accessible as they age.
How to prevent: One of my favorite Bible verses is Proverbs 11:14. “In the multitude of counselors there is safety.” Without getting too religious, this verse speaks to every day situations that we face. The more counselors and different perspectives we seek advice from, the safer we are. It is always a wise decision to seek advice on big financial decisions like this, perhaps from a family member or long trusted friend.
If lenders are actively seeking you out over and over, this is also a warning sign. Sure, refinances are how they make money, and owners can certainly benefit from them, so it makes sense to receive some advertisements from lenders here and there. If they are constantly reaching out to you however, especially after you have already recently refinanced, this is a red flag.
5. Fake Rental Scam
Scammers also love to post properties for rent on Craigslist or Facebook Marketplace. The only issue is that they don’t own the properties they list, nor have they ever seen them, nor are they even for rent. The pictures are often from other properties for rent.
These scammers will then ask for an upfront payment or refundable security deposit before they allow the potential tenant to ever see the property. It may not sound like the most convincing scam, but renters fall for this all the time. According to ApartmentList, an estimated 5.2 million people in the U.S. have been victim of rental fraud. Of those millions, one in every three lost more than $1,000.
How to prevent: Pay attention to red flags that could indicate that the person listing the property is dishonest. If it sounds too good to be true, it likely is.
The FTC has some guidelines on how to protect yourself against rental scams. Some red flags you should keep an eye out for are prices that are much lower than comparable properties, grammatical and spelling errors, the “owner” does not want to meet you, they are encouraging you to move in ASAP, and most of all, they charge you a fee to view the property.
With more and more clever and deceitful people trying to get into your hard earned money, it is more important than ever to keep an eye out for them. Staying educated on how they work is the best way to proactively prevent them from getting the best from you, and seeking advice from those you trust is sure to decrease the chances of falling victim to them. When it is time for you to make a move in the market, work with a professional and diligent agent to make sure you are in the safest position possible.