Real Estate Schemes Prey on Homeowners and Lenders

As the real estate bubble is topping out more and more real estate scam artists are launching attacks on homeowners. The IRS has initiated 235 fraud cases against individuals in 2005 and the number is expected to remain steady or increase during 2006.

The types of fraud vary but the most prevalent fraud cases are related to mortgage fraud. Mortgage frauds are contributing to the higher number of foreclosures among homeowners. One type of fraud is known as straw buying. In this case the sellers artificially inflate the value of a property by having friends bid up the property and back it up with forged appraisals. The lending institution would then issue a mortgage, the seller would collect the money, and the buyer would disappear and not even make one mortgage payment. The lender would be left holding the bag on the mortgage.

There are various other schemes that prey on homeowners. In one of the most common type of rip-offs, homeowners would sign away deeds on their homes as "collateral" and take on loans they could not afford. This could easily lead to a homeowner going into foreclosure. In some cases homeowners are encouraged to fudge annual income claims to qualify for a larger loan. The outcome is predictable, the homeowner goes into foreclosure.

A typical scenario that occurred in Pueblo Colorado is being played out all over the country. An appraiser overvalued a home by using fraudulent comparable home values so buyers can purchase a home with no down payment. AGain the outcome was predictable, homeowner foreclosure.

Also common are techniques that strip homeowners of their equity in their home. Homeowners in debt are easy targets for this type of fraud. Sub-prime loans are pushed by mortgage brokers that have no responsibility to the homeowner. The homeowner will often go for the quick cash but lose all the equity in their home along the way. More and more states are instituting new regulations that will help guard against this activity.

Another fraudulent activity centers around the use of lease options. The target of this scheme is renters who are unable to afford a down payment. Of course not all lease option deals are fraudulent, however the renter needs to do their homework. Also the renter needs to take a realistic look at their financial situation and determine if they will have money for the down payment when it comes time to exercise the lease option.

In this scam landlords will sign the renter up with an option to buy the property. The landlord will charge the renter up to $10000 for the right to purchase an option. An extra amount of money that is above the market rent values, will be charged to the renter each month. The money paid for the lease option and the extra rent money are supposed to go toward the down payment when and if the renter exercises their option to buy.

Two years later the renter is just as likely to qualify for a mortgage as when they initiated the lease option. Shrewd landlords, knowing their real estate markets very well, will often price the lease option above market value. In a number of lease-option deals that were reviewed, it became clear the landlord never intended to sell the property. In some cases the landlord tried to get out of the deal when the renter was able to come up with a down payment and the house was at or below market value.

Homeowners need to take special care when purchasing using lease-options or refinancing. Even though there are laws regulating fraudulent activities, without understanding the market and their own finances, borrowers can get themselves under water very quickly. As a homeowner I am constantly bombarded with flyers in my mailbox and marketing calls on nights and weekends. These advertisements promise me all kinds of hard to believe, too good to be true refinancing deals. Many of these calls are originating from call centers outside of the country. Any worthwhile refinancing deal can be found locally if you look hard enough. No need to deal with far off unregulated mortgage lenders promising you the moon. It pays to take your time and get educated.

This article only begins to scratch the surface. Scams luring real estate investors are also prevalent. These usually go like you get some real estate investment at a low price in an unbelievably hot area that will double in the next two years and a property management company willing to screen your renters and take care of your property for a tiny fee. This scenario does not always pan out. Just ask the investors who poured into the Phoenix market and are still holding their properties. The housing bubble has not burst but the markets have changed. Be careful!