How To Run Proper Real Estate Scams
As an industry, we don’t spend enough time talking about how to spot common real estate scams. Because of the complexity of real estate transactions and the large amount of money involved, real estate scams are everywhere. Both consumers and real estate professionals should know what’s up.
The following real estate scams are some of the common ones, and there are plenty more out there.
Rent-to-own real estate scams
There’s nothing inherently wrong with rent-to-own programs. The trick is that they can be abused. The honest rent-to-own landlords/sellers help people who have financial challenges (bad credit, no credit, no down payment, etc.) get into homeownership, which is great.
The bad actors in the rent-to-own world use their programs to take advantage of renters/would-be buyers. The most common way this happens is when the terms to buy the property are too stringent and the owner/seller knows the renters/buyers won’t ever be able to purchase the properties they are renting.
A young couple, let’s call them Hill and Billary, have bad credit due to some unpaid medical bills a few years ago that weren’t covered by their insurance. They both have stable jobs with decent incomes, but they don’t qualify for a traditional mortgage from a bank because of the dings on their credit report.
They would like to purchase a house, but it is going to take a few years to pay off the bad debt and repair their credit. That’s not a big deal. So far, so good.
They do some Googling and find a rent-to-own program in their town. They found one that has a house available in a neighborhood they like. Exciting!
The landlord, let’s call him Donnie, is less than scrupulous. He smells an opportunity to take advantage of Hill and Billary, so he’s going to take it.
Based on the amount of outstanding bad debt that Hill and Billary have accumulated, Donnie knows it’s unlikely that they’ll make much of a dent in repaying it over the next few years. He rubs his tiny hands together in anticipation of taking advantage of the young couple. Donnie lives for moments like this. Because when you’re a landlord, “they let you do anything.”
The young couple doesn’t know what’s happening to them, but they agree to the predatory terms laid-out by Donnie. The monthly rental rate is $2000 a month for the house, when comparable houses in the neighborhood are renting for $1200 a month.
The $800 difference every month is SUPPOSED TO go toward the eventual purchase of the house, assuming the young couple will qualify for a mortgage by the time the three-year agreement ends.
The young couple is optimistic and believes they’ll be able to get a mortgage in the next few years. Donnie knows they won’t be able to repair their credit enough to get a mortgage unless they have an unexpected financial windfall.
That means Donnie will be collecting an extra $800 a month in rent for the next few years and he’ll get to keep it all when the couple discovers they can’t pay off enough of their debt to get a mortgage.
Booooooooooo. Not nice. You’re fired, Donnie!
The lesson here is that not all real estate scams involve trickery. Some of them require voluntary action by the victims.
Email phishing scam
“Dear sir. I am in possession of 40 million US dollars that I inherited from my rich uncle, who was a Nigerian prince. You come highly recommended by your associates and I am looking for someone to wire me 50,000 US dollars in order to pay the taxes here in Nigeria, then we can split the 40 million US dollars 50/50. This is urgent.”
The amateurish Nigerian email scams are usually easy to spot, but they still snag a few people every year.
What about this one?
“This is Jennifer from Wells Fargo’s mortgage department. We’re almost finished with your closing documents and we’re ready for you to wire the balance of your down payment. Please send it to our general escrow account.
Account number: 8675309
Routing number: 5898383”
This one is nasty because it comes from an email address that has a one character difference from a real Wells Fargo email address (like, [email protected] with the letter O being a zer0) and the design of the email is almost identical to the look and feel of emails that Wells Fargo sends on a regular basis.
To make it even worse, the scammers have gotten VERY good at mimicking website landing pages of the major financial institutions. So, you might not catch this one even if you click through the links on the email to see if it takes you to your financial institution’s website.
Foreclosure rescue scam
Foreclosure rescue scams aren’t very prevalent these days because foreclosures aren’t very prevalent these days. They’ll be back someday, and hopefully not at the scale we saw last time.
I could write an entire book on foreclosure scams and short sale scams (in fact, I DID and you can buy it on Amazon. Some of the material is a little dated, but it’s still mostly good.
The most common foreclosure real estate scams prey on people who are embarrassed about their situations or uneducated about the foreclosure process. The “rescuers” assure the homeowners that their house/credit/dignity/cash in the bank can be saved.
These real estate scams usually involve hefty upfront fees paid to the scammer in exchange for the scammer negotiating with the lender on behalf of the homeowners. The pitches for the scams depend on how far into the foreclosure process the owners are by the time they ask for help, and the particular scam that’s being run.
In a best-case scenario, the owners pay a fee to the scammer, the scammer does little to nothing and walks away with the cash BUT the owners figure out how to keep their home by negotiating with the bank. Losing a few grand is not a big deal here, all things considered.
In a worst-case scenario, the owners lose the scammer’s fee, their credit is thrashed, their savings and retirement accounts are depleted and they LOSE THEIR HOUSE. Nasty business.
After the financial crash in the late 2000s, many states passed laws to address the obnoxious number of foreclosure scams. Some of the bad actors were busted and punished with fines and jail time. Many others walked, like the criminals on Wall Street who made the whole thing happen in the first place.
Good for them. I hope they sleep well at night.
“We buy houses for cash” scam
If you live in the US and you pay attention to your surroundings, you’ve certainly see the signs that say, “We buy houses for cash” or something similar. The signs are typically made from Wal-Mart poster board and the writing is done by hand with a Sharpie. Sometimes you even see smiley faces in the O’s or zer0s.
Those signs look amateurish by design. It’s not an accident.
The people who post those signs are usually sophisticated investors. They know they’ll have a better chance of having people call them with houses for sale if the signs look cheap and unprofessional. They simply want more phone calls from people who need to sell property fast.
There’s even an official industry term for the signs: Bandit signs.
Cool name. Sounds sexy.
These investors know there are people in the world who need to sell their property fast and for cash. The investors expect a hefty discount on the market value of the property because they can close quickly and for cash. The good investors are upfront about that strategy and disclose it to the sellers.
That by itself is fine. By low, sell high. We know that model.
There’s nothing dishonest or scammy about purchasing a house at a discount. If the buyer and seller are both educated about the true market value of the property and they agree on the price and terms, there’s no issue.
The real estate scams to watch in this arena are tied to lack of transparency and lack of market knowledge. Sophisticated investors know when they are talking to a sucker. Sellers who know nothing about the true market value of their property, the investors’ intentions or the terms of the deal are the ones who lose big here.
It’s easy to get taken if you don’t know what’s happening.
There’s a long-time real estate investor, let’s call him Donnie, who has a great reputation around town. He has the best track record ever. There’s never been a better track record. It is tremendous.
Donnie gets a call one day from one of his old friends. The friend recently inherited his grandmother’s house. Grandma lived in the house for 60 years and the last time the house was updated was never.
The friend (now owner) has neither the time nor interest in making repairs and updates. He simply wants to sell it for whatever it’s worth in its current condition. He wants to move on with his life.
Houses that ONLY need cosmetic work are some of the best houses for real estate investors. Donnie is going to make some bigly profit from this one because he DOES have the time, money and interest in making cosmetic updates and repairs, and the patience to wait for a solid offer.
In this scenario, everyone leaves happy. The seller gets his cash, the investor gets his profit and the eventual buyer gets an updated house.
Thanks, Donnie! You’re not fired this time.
Airbnb is a wonderful service. I’ve used it all over the world and I have had some amazing experiences throughout the process. I always opt for an Airbnb over a hotel when I’m traveling.
If you’re not familiar with Airbnb, it is a platform that connects people who have living spaces with people who need them. The “spaces” can be couches, bedrooms or entire apartments/condos/houses.
You can think of Airbnb as a “distributed” hotel. It’s kinda like a hotel, but with more personality and less attitude.
For the people who are renters on Airbnb, it provides a place to stay that isn’t a hotel. Are you on a budget and highly social? Rent a couch for the night. Are you private and want your own space? Rent an entire housing unit. Do you want to stay in a tree house? Fine. Do you want to stay on a yacht? Great. All of those options are available on Airbnb.
They have something for everyone. For real.
There are a few popular Airbnb scams floating around these days. We’re going to talk about the one that nabs a few unsuspecting Airbnb renters every year.
You would like to take your family on one last trip this summer before the kids have to go back to school. You do some research and find a house on Airbnb that looks perfect! It’s big enough for your family and close to the attractions in town. It even has a hot tub.
You submit your request for the house on the dates you need it and the owner gets back to you within the hour.
The owner is super friendly and even suggests a way both of you can save a little money. If you pay the owner via Paypal instead of through Airbnb, neither of you will have to pay the Airbnb booking fees.
You send the (discounted) payment to the owner through Paypal and start planning your trip.
A few weeks later, you, your family and your car full of supplies for the week arrive at the rental house. Oddly, there’s a car in the driveway when you arrive. Huh. Weird.
You tell the kids to start collecting their things from the car and you go to the front door to find the lockbox. You don’t see a lockbox, but the front door is open. You ring the doorbell and a man comes to the door. “How can I help you?” he says.
After a bit of back and forth, it becomes clear that you have been duped. The owner of the house explained that you were the third person this month who responded to a fake ad for his house on Airbnb.
He has lived in the house full-time since he bought it last year. He has never posted his house on Airbnb, but somebody stole the interior photos from Zillow when the house was for sale. Those are the photos the scammer is using to trick people.
You contact Paypal to see what they can do to help, and they are useless. Your money is gone.
Lesson: When a platform like Airbnb tells you to pay through the platform, it’s best to do what they say.