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Notice to PI Members – Real Estate Fraud

Fraud in real estate transactions is a growing area of concern. The following examples show how two of the more common types of fraud- identity fraud and value fraud- may occur. We have also provided you with some red flag indicators and some loss prevention tips to assist you in avoiding a potential insurance claim.

Identity Theft Fraud
In this circumstance, the client impersonates the true owner of the property using fake ID’s. The client sells or mortgages the property, or discharges the mortgage from title, then gets a new mortgage from another lender. The paperwork looks in order, there are no encumbrances on title. The client is accommodating but rushes you and likely discourages a house inspection or appraisal. The transaction closes, the lawyer pays the proceeds to the client who makes a few mortgage payments and then disappears with the remaining funds. The lender then sues the lawyer for the value of the mortgage.

Value Fraud
In these type of schemes, the true value of the property is artificially inflated to deceive the mortgage lender. This is accomplished in one of two ways, either through flip deals or misrepresentations of the original purchase price.

An example of a flip deals is where a fraudster arranges to purchase a property from a legitimate vendor for $200,000. The fraudster then arranges for another purchaser to buy the same property for $400,000. A lawyer is retained to act for the fraudster and the purchaser in the second transaction. Purchaser Two then applies to a bank for a high ratio mortgage (95% of $400,000) and the bank approves Purchaser Two for a mortgage of $380,000. Both transactions close on the same day. The fraudster and Purchaser Two instruct the lawyer to change the deed delivered by the original owner to show the higher consideration of $400,000. On closing a portion of the mortgage proceeds is used to complete the first transaction and the balance or excess is paid to the fraudster and/or Purchaser Two. Sooner or later, the fraudster disappears, leaving the bank holding a mortgage for far more than the property is worth.

Another type of value fraud is a misrepresentation of a home’s purchase price, indicating a higher purchase price than the actual purchase price. For example. A purchaser agrees to buy a home for $200,000. The purchaser applies to the lender for a $150,000 mortgage. On the closing day, the vendor and the fraudster then sign a one-page amendment that provides a credit of $50,000 against the purchase price (stated to be for repairs). The fraudster does not disclose this credit in obtaining high-ratio financing. The deal closes and the mortgage payments stop shortly thereafter. The fraudster disappears with the balance of the financing leaving the bank with a mortgage greater than the value of the property.

Red Flags
There are usually indications that a fraud is taking place. Here are some of the red flags to watch for:

The Client
– The client has recently purchased the property on an all-cash basis and is now seeking to place a mortgage against the property.
– The client does not seem to care about property, price, mortgage interest rates, legal and/or brokerage fees.
– The client has a transfer of the property but no other documents relating to the purchase of the property.
– The client does not appear familiar with the property.
– The client does not return to the lawyer who did the purchase to do the mortgage transaction and expresses a desire for the new lawyer not to contact the former one.
– A historical title search reveals recent transfers at increasingly higher amounts, perhaps with the same lawyer on all the transactions.
– A third party controls the transaction (e.g. gives instructions to the lawyer or arranges for the parties to the transaction to sign documents) and directs the parties in the transaction.
– The client does not have a personal cheque for his or her pre-authorized debit plan but provides a blank “counter cheque”.
– The lawyer is instructed to pay the excess mortgage proceeds to a third party with no apparent connection to the transaction.

Agreement of purchase and sale
– The agreement contains no handwritten amendments.
– The client is reluctant to produce identification or is uncomfortable with you making (front and back) photocopies of the identification produced by the client.
– An amendment to the agreement provides for either a reduction in the purchase price or a payment to the vendor following closing.
– The vendor acknowledges payment of a deposit that is not required by the agreement of purchase and sale.
– The deposit is payable directly to the vendor, not to a real estate agent or a lawyer.
– There is no real estate agent involved in the transaction.
– There is an agent listed in the agreement, but the lawyer does not receive any communications from the agent or the agency (such as for payment of a commission).

The transaction
– The client does not have fire insurance on the home.
– The utility companies are unaware of the vendor owning the home.
– The client needs to close the transaction very quickly.
– The client is a new client and promises to refer more transactions to the lawyer.
– The client arranges the mortgage through a broker, and the brokerage fee is unusually high.
– The client is prepared to pay higher legal fees than normal for the lawyer’s services.
– The purchase price is much higher than the purchase price of recent transfers of the same property.
– There are large and unusual adjustments in the Statement of Adjustments (e.g. a large credit for renovations or work to be done).
– The statement of adjustments does not reflect the terms of the agreement of purchase and sale and any amendments thereto.
– The title indicates a pattern of mortgages being registered and discharged shortly afterwards.
– All of the funds required to close the transaction come from an institutional lender.
– The name of the client in the identification produced by the client does not match the name of the client in other documents in the transaction.

Mortgage proceeds
– There is a surplus of mortgage proceeds after the closing of the transaction to be paid to the borrower or to a third party.
– The client directs part of the mortgage proceeds to third parties (e.g. off-shore recipients, currency exchange).
– The client instructs the lawyer that it is unnecessary to prepare written directions authorizing the payment of funds to third parties.
– The mortgage is a cash-back mortgage and the cash-back is the full amount of the equity in the property.
– The client directs the lawyer to rebate a portion of the mortgage surplus to the vendor.

Flip transaction
– The vendor acquires the property the same day that it is being sold for a higher purchase price (flip transaction).
– The lawyer is asked to act for both the purchaser and the vendor in the flip transaction.
– A bank loans money on the strength of the consideration contained in the flip agreement.
– The client instructs the lawyer not to disclose to the lender that the transaction is a flip or that the lender is lending money on the higher consideration.
– The transfer signed by the original vendor contains a lower consideration and is manually altered prior to closing to match the consideration set out in the agreement of purchase and sale.
– The mortgages arranged in these transactions are high-ratio mortgages with mortgage insurance.
– The lawyer is instructed to use the excess mortgage proceeds for the purchase of another property.

To avoid a potential insurance claim look for the red flags of fraud while considering these Loss Prevention Tips:
– Adhere to the Law Society Client ID Rules.
– Avoid having documents executed outside your office.
– If unsure, consider discussing the transaction with a Law Society Mentor.
– Consider market trends in the transaction area.
– Trust your instincts. Don’t let yourself be pressured into acting on a transaction that doesn’t feel right.
– Check property ownership history – confirm current owner of the property and be vigilant of property flips. Be extra vigilant when the property is mortgage free and the discharge has only recently been registered.
– When representing a vendor or mortgagor ask him or her to provide you with more than his or her deed; ask for survey or plot plans, as well as tax bills and assessment notices.
– Carefully compare the terms of the Purchase and Sale agreement you receive with the mortgage instructions you receive; examine for discrepancies in purchase price.
– Be suspicious when asked to pay funds from your trust account to parties who are not the vendors noted in the purchase and sale agreement, or have no apparent connection to the transaction.
– Always review the work of your staff.
Resources: Extracts used from a Bulletin entitled “Fraud” by Lawpro and reprinted with permission