In 2019, there were more than 3.2 million fraud and scam reports made to the Federal Trade Commission (FTC), accounting for an estimated $1.9 billion in losses.
Here's a look at the most common types of fraud and scams that could impact real estate investors.
- Many types of fraud related to real estate investing have trended down over the past few years.
- Credit bureau fraud, on the other hand, has increased by more than 5x since 2015.
- While home repair fraud has dipped since its peak in 2019, it's still almost 3x as high as it was at the end of 2017.
- 6.4% of U.S. renters have been the victim of rental listing fraud, something that landlords should keep in mind.
There are two types of mortgage fraud investors need to know about.
First, lenders can intentionally deceive consumers with their products. This can cause problems for investors who are looking for reliable sources of real estate financing.
The FTC reports that this type of mortgage fraud hit its peak in 2015, with 16,513 cases reported during the third quarter of that year. It has mainly been trending downward since. For instance, the most recent data shows that only 8,373 cases have been reported in the second quarter of 2020.
The other type of mortgage fraud is committed by investors. This type of fraud involves intentionally furnishing false information on a mortgage application; for example, saying you intend to use a property as your primary residence when it really will be an investment piece.
On this end of the spectrum, CoreLogic (NYSE: CLGX) reports that the year-over-year trend is down 22.6% from the second quarter of 2019.
The decrease is thought to be largely due to the current influx of refinances the mortgage industry is experiencing.
Aspiring investors hoping to learn the ins and outs of real estate investing need to be cautious about seminars that promise the possibility of sky-high earnings and never deliver.
This is a common scam in the real estate investing world, although reports of advice and seminar fraud have gone down in recent years.
On the whole, the number of reported cases of investment fraud has remained relatively stable over the past few years. According to the FTC, there were 16,057 reported cases of investment fraud in 2017, 15,456 cases in 2018, and 16,708 cases in 2019.
Despite the slight uptick, investment fraud has made up a similar percentage of total reports. Investment fraud accounted for 0.55% of reports overall in 2017, 0.50% in 2018, and 0.52% in 2019.
Credit bureau fraud
This type of fraud is relevant to real estate investors who follow a buy-and-hold strategy and perform credit checks on potential tenants.
Credit bureau or credit reporting agency (CRA) fraud occurs when a CRA provides inaccurate information on a consumer credit report, refuses to reinvestigate disputed information, or offers inadequate assistance.
It can also happen when companies provide incompletely or inaccurate information to consumers or credit bureaus.
In 2019, there were 165,231 reports of this and related types of fraud, which accounted for 5.16% of all fraud reports.
Though most types of real estate fraud are trending downward, this type of credit fraud has been on the rise over the last few years.
Credit bureau fraud reports accounted for just 3.77% of all fraud reports in 2017. By 2018, that percentage had jumped to 4.44% before climbing to 5.16% last year.
Home repair fraud
Investors who follow a fix-and-flip strategy need to be on the lookout for cases of home repair fraud.
As the name suggests, home repair fraud primarily involves contractors deceiving customers by doing shoddy work or never completing jobs.
According to a HomeAdvisor (NASDAQ: ANGI) survey, about one-third of homeowners fear becoming victims of home repair fraud, and data suggests they are right to be suspicious.
The FTC shows this type of fraud is also on the rise. When you include furnishings, home protection devices, and a few similar categories, there were just 11,054 reports of home repair fraud in 2017, 17,177 reports in 2018, and 23,963 reports last year.
Foreclosure relief fraud
The intent behind foreclosure relief fraud may seem obvious, but there's more here than meets the eye.
In general, it involves financial entities that make false promises to help save consumers' homes when the homeowners are facing financial difficulties. However, investors should note that this category of fraud doesn't simply include entities who never provide services; it also includes those who charge exorbitant fees for their work.
While the FTC reports that foreclosure relief fraud hit a peak in 2015, accounting more than 1,400 reports that year, it has mainly been on the decline since. The most recent data from the second quarter of 2020 shows that there have only been 175 reports made to date.
However, the FTC also suggests that when foreclosure relief fraud does happen, it can be costly. The 2019 Consumer Sentinel Network Data Book named this fraud category as having one of the highest median losses among individuals. While the median loss across all fraud reports in 2019 was just $320, foreclosure relief fraud had a median loss of $1,290.
Tax preparer fraud
Tax preparer fraud involves companies that pretend to be tax preparers or the IRS in order to steal funds from consumers, companies that skim funds from consumer tax refunds, or companies that charge inflated fees for their services.
This type of fraud tends to follow a yearly ebb and flow. It hits a peak in the first quarter of the year and a low point in quarter four.
However, from a year-over-year outlook, the numbers are fairly steady. In 2017, there were 3,739 cases compared to 4,295 in 2018, and 4,096 in 2019.
Rental listing fraud
Lastly, investors who follow a buy-and-hold strategy also need to be aware that rental listing fraud is a crime that could impact their renters. Unlike the other types of fraud on this list, rental listing fraud may not impact investors directly. But it's important to know it exists so they can do their best to ensure their listings do not appear suspicious.
With that in mind, landlords should know that 6.4% of U.S. renters have been a victim of rental listing fraud, according to recent research by Apartment List. Unlike other scams, which tend to target older adults, the majority of renters who fall victim to rental listing fraud are younger; 19-to-29-year-olds are 42% more likely to be victims of a scam.
Additionally, when renters lose money to these scams, they tend to lose big. The Apartment List data found 31.3% of renters who lost money ended up losing more than $1,000 to the scam. An additional 17.6% lost more than $2,000.
The bottom line
Though no one likes to think about the possibility of falling victim to a scam, it's important for investors to be aware of the different scams that could affect them so they can do their best to keep their money safe.
Always do your research. Research every investment you intend to make and company you intend to use. Armed with this knowledge, you should be able to make the smartest decisions for you and your wallet.
- Bennet, Sydney and Igor Popov (2018). Apartment List. "Million Dollar Scam: Rental Fraud Costs 5.2 Million U.S. Renters."
- CoreLogic (2020). "Mortgage Fraud Brief: Quarterly Mortgage Fraud Insights (Second Quarter 2020)."
- Federal Trade Commission (2020). "The Big View: FTC Consumer Sentinel Network."
- Federal Trade Commission (2020). "Consumer Sentinel Network Data Book 2019."
- HomeAdvisor (n.d.). "Contractor Survey Results."