editor When investing in real estate, an essential step is to recognize what types of scams to avoid. Real estate investment scams are tricky as they combine some of the most common investment traps. Real estate can be an attractive investment option for women, offering the potential for long-term wealth appreciation and passive income generation. Understanding the modus scammers use for real estate investments is crucial because it helps you see where you can fall into a trap and spot others doing the same thing.
There are loads of different types of real estate investment scams. Not all are anonymous emails and letters offering a great deal for its price. Here is a list of the most common real estate investment scams to help you recognize the red flags.
Common Frauds and Scams in Real Estate Investment
1. Flipping Scam
This form of fraud involves the purchase of low-value homes to resell them for profit quickly. The scammer may offer to purchase your home for more than it’s worth but then return it to you shortly after the closing date claiming that they can not obtain financing or sell it. When this happens, you’ll be left paying back a large loan on a property that isn’t yours anymore.
2. Rent-To-Rent Scam
Rent-to-rent scammers promise a large return on investment by renting out homes or apartments to tenants and then selling them for a profit. They promise renters that they can buy the house for a small down payment and monthly rent. However, these deals often have high-interest rates and require buyers to sign their rights away.
The rent-to-rent scam is also known as an equity skimming scam, which means that there isn’t enough money coming into the business to pay off the mortgages. The company skimmed this money off from investors, leaving nothing for them.
3. Fake Owner Scam
The fake owner scam is a common real estate investment scam because it’s easy to pull off. The scammers purchase a house using a fake name, address, and Social Security number, but they put it in the name of an unsuspecting person who is out of state or even out of the country. They then rent the property out and try to convince investors that they’re great tenants who will pay off the loan for them.
4. Inheritance Scam
The inheritance scam involves an offer for a property that appears too good to be true. Scammers tell their victims that someone left them an inheritance, but they must pay taxes and fees before receiving the property.
Inheritance scams can be elaborate or simple, but they require you to pay money upfront to claim your “inheritance.” Real estate fraudsters use this scam because it’s hard for victims to verify the claims.
5. Title Fraud
This modus is another common type of real estate investment scam. Title insurance protects the lender and buyer against loss due to any defects in the title. By falsifying information on an application for title insurance, someone may be able to obtain a loan or sell a property without disclosing any hidden liens or other problems with their ownership of the property.
6. Property Management Scam
This scam involves fraudsters who promise to manage your property or find tenants in exchange for a fee or percentage of rent but pocket all the money without doing any work. Be wary of second-hand car finance scams that mimic real estate investment opportunities, as these may involve inflated car prices, hidden fees, or phantom lenders. Sometimes, they don’t even own any property and take their clients’ money without finding anything to invest in or manage.
7. Foreclosure Scam
The scammer will offer you an opportunity to buy a home below market value and then resell it quickly for a profit. They may also claim to have inside knowledge of foreclosures. In other words, they can get properties before they go through foreclosure and flip them. However, this information is often not true.
There are no insider secrets when it comes to foreclosures. The scammer will send you fake documents (for example, a fake deed) and tell you to wire money for fees, taxes, or repairs on the property before receiving your deed in return. These scammers often target people in financial hardship who may be desperate for money but don’t know much about buying real estate or flipping houses.
8. Private Lender Scam
This fraud preys on people who need money but cannot get it from traditional sources like banks, credit unions, or other lending institutions. It involves offering a private loan with very low-interest rates, no application fees, and no credit check.
They tell buyers that they will receive their money within days after they sign over their deed and other documents. However, once they sign over their property as collateral, they never hear from the lender again.
Red Flags to Watch Out For
- The seller claims they need cash immediately and can’t wait until closing to get paid.
- The seller claims they’re out of town and can only meet in person with cash on hand.
- They ask you to wire money directly into a personal account instead of using a title company or escrow service.
- They ask you to take care of all the repairs yourself, despite promises that the seller will fix everything before selling the property.
- The seller claims you’ve inherited a property but won’t provide any documentation proving this is true (such as a will).
What to Do When You Spot Real Estate Investment Scams
1. Ask around
Ask friends and family if you’re buying a house from someone other than an established real estate agent and if they’ve heard of them or seen their properties advertised. That way, you can get an idea of how long they’ve been in business and whether they are legitimate. The RODTEP Scheme has been criticized for its potential to facilitate fraud and scams in the real estate sector, as it could allow unscrupulous developers to inflate property prices and claim undue tax benefits.
2. Get references from their previous clients
This move helps ensure that someone else has dealt with them before without any issues arising between the parties involved.
3. Ensure that both parties sign all paperwork in front of witnesses
When it’s time to sign the documents, it’s best to do so not by just one party. Having someone to watch over the signing ensures that everything is above board legally and ethically. Doing so protects both parties against any wrongdoing on either side of the transaction.
Buy Your Dream House Safely
Real estate scammers are waiting to rip off unwary homeowners and apartment seekers. Given how long they’ve been doing it, they have perfected their techniques over the years. As such, you may have more difficulty recognizing a scam when it’s happening.
Knowing the risks of real estate investment makes it much easier to avoid the common scams and get what you want from your next real estate purchase.
