Oct 2010 18

Real Estate Scams and How To Avoid Them

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Photo by L E MacDonald Photo by L. E. MacDonald

Most of the real estate professionals are experienced people dedicated to their job of getting the best place to live in for their clients. However, real estate transactions involve large financial transactions and that is natural call for various scammers. White collar crime is avoiding the real estate industry and scammers are targeting homeowners, home buyers and home sellers with fraudulent deals. Their imagination is remarkable and oftentimes we can’t do much more than minimizing the damage they inflict. By becoming aware of the most common real estate scams, you may be able to protect yourself or someone you know. Consumers, beware !

1. Home Equity Scam

Before signing on the dotted line, it’s important to learn about and recognize the warning signs of the two most common types of predatory lending: equity stripping and equity flipping.

Equity Stripping or “the bailout” Equity stripping is one of the simplest asset protection methods and can also be one of the most successful. This is the very likable definition, but that´s just business. Banks and other lenders are in the business of making large profits on the money you borrow for your home. Some financial organizations may encourage you to leverage yourself beyond your means. Also known as home equity liquidation or collateral stripping, there are many terms for the same thing: taking cash out of your home. If you have trouble making monthly mortgage payments, applying for additional credit against your home is not a good idea.

It’s referred to as equity stripping partly, because the lender will take away your home and strip you of all the equity you have built. Here is a good rule of thumb. If a lender tries to talk you into falsifying information, such as the source of your down payment, or exaggerating your income to qualify for a larger loan, it’s time to get another lender. You have invested in real estate for the long term, and so should your lender.

What should you do to avoid this scam?

  • do not fall for promises like “We’ll save your credit” or “We will get you a new mortgage with low monthly payments.”
  • do not sign away ownership of your property (sometimes called a “quit claim deed”) to anyone without the advice of lawyer you trust,
  • beware of any home sale contract where you are not formally released from liability for your mortgage

Equity Flipping This entails purchasing properties and reselling them at inflated prices. These scams usually involve faulty appraisals and inaccurate loan documents. The property is then refinanced or resold immediately after purchase for an inflated value. The home is purchased at a higher price, often by straw buyers working with the “flipper”, and eventually falls into foreclosure.

The problem is that these flipping tactics are loaded with fees and hidden terms. In most instances, the real winner is the lender. This scheme is more insidious than most, as the full financial impact of this constant “flipping” is not felt right away – sometimes not until you have been refinanced out of your home.

How to identify equity flipping?

  • the seller recently having acquired the title or acquiring the title concurrent with the transaction,
  • a property that was recently in foreclosure being purchased at a much lower price than its sales price,
  • the owner listed on the appraisal and title not matching the seller on the sales contract

2. Loan Vs. Line Of Credit

Many homeowners prefer to use a home equity loan in purchasing a second or investment property. A home equity loan can also be used to refinance a homeowner’s existing mortgages in order to avail of lower interest rates. Apart from the interest, the monthly payments can also be reduced. A homeowner may even avail of a bigger loan amount if he or she has already built up a considerable amount of equity in his home, which is really a big benefit.

However, there is another option available which is applying for a home equity line of credit, also known as HELOC (Home Equity Lines of Credit). This is very possible especially if your home equity is sizeable enough. With a line of credit, you have more options available such as paying for the down payment of your investment property, home improvements and other expenses. In addition, you can enjoy tax deductions making the cost of your money very low. And with a HELOC, the interest charged is only on the funds that you have actually withdrawn from your credit line.

Before you start considering using your home equity, experts advise to always do some research. Weigh the advantages and disadvantages and assess your needs as well as your financial capabilities. Being prepared and knowledgeable is an ideal attitude that every real estate investor should keep.

3. Home Improvement Scam

If there is a sucker born every minute, then unfortunately there is a swindler born every minute, too. As many homeowners have discovered, good contractors can be hard to find. If you are planning a home improvement project, referrals for reputable contractors from friends and family, as well as your local building inspector, provide an excellent resource.

Chimney Scams

One of the most common homeowner swindles is the chimney scam. You call a chimney sweep to clean and inspect your chimney and they inform you that you need a new liner, or the whole chimney needs to be replaced, because of cracks (thoughts of carbon monoxide poisoning your family fill your mind). In some cases these bogus sweeps do not even clean the chimney !

If your sweep uses scare tactics or informs you that you need a new liner, or need a large-scale chimney repair, do not agree to the repairs until you get another opinion. One great resource is the National Chimney Sweep Guild, which provides a state-by-state listing of certified sweeps.

Radon Scams

Radon was the big real estate scare several years ago, but as time has passed, the fervor over it has decreased. Radon is an invisible radioactive gas that is a product of decaying uranium found in most kinds of rocks and soil. While not all scientists agree, some say this gas is linked to lung cancer. You can test to determine if radon gas is present in your home. It can seep into your basement, permeate up through your home and get trapped there. Beware of unlicensed radon “mitigators”. With airborne threats we can’t see come scammers with scare tactics and false claims aimed to take your money.

Termite scams

Termite infestations are more common in warmer, wetter climates like the South, but termites can wreak havoc anywhere. If you find yourself over-run with the wood-eating creatures, finding a reputable pest-control company through referrals and company research is key to getting good service. One of the scams to look out for in the pest control business is exterminators who bring their own “evidence”, generally termite wings or droppings to show you proof of an infestation. Always ask the exterminator these questions:

  • Do they know the difference between ants and termites ?
  • Do they think the infestation is new or old ?

Any pest-control specialist should know the difference between ants and termites, but ants with wings viewed by the untrained eye can be mistaken for the termite. One homeowner complained of her bad experience with a company who promised to “control” the termites instead of exterminating them. This is an important difference when you hire a pest control company.

4. Foreclosure Scam

Foreclosure scam has become very popular in cottage industry. The trick is greatly clear. Homeowners who are having problems paying their mortgage are approached by someone who represents themselves as a mortgage consultant or a foreclosure service. The scam artist offers to help these desperate homeowners and gets the home owner to transfer the title or deed to them. They may use a sales pitch – such as “I can save your credit!” – while asking the homeowner to pay the mortgage payments directly to them. In some cases, the “rescuer” will also try to collect a fee before they assist the homeowner. In the worst cases, the “rescuer” may also obtain a second loan on the property, take the proceeds and leave town, or rent out the home – forcing the current distressed resident to be evicted.

Some useful and specific advices :

  • never sign anything without consulting an attorney, a legal aide, or a credit counsellor,
  • be careful when accepting a “refferal” from a rescuer, make sure and do your due diligence on anything prior to executing a signature

5. Mortgage Scam

In one example, the buyer sometimes a “straw borrower” uses a fake identity or another person’s name and credit history to obtain a fraudulent loan. In this scheme a combination of identity theft and mortgage fraud is used to swindle the seller and the lender. The “buyer” offers the seller much more than the home is worth, secures a loan for the over-valued price, then pockets the difference. And in a worse case, the swindler convinces the seller to finance some of the cost of the mortgage. The seller ends up handing cash to the “buyer”, who has no intention of actually purchasing their home. Who loses ? Everybody !

Mortgage scam advices:

  • identity theft is pervasive in mortgage and foreclosure fraud,
  • protect yourself by checking your credit report once every six months

It is not always easy to follow all the rules and hints - that's why realtors are here to help you. However, here are the most important ways to prevent being victim of real estate scam you should always keep in your mind:

  • deal locally with folks you can meet in person – follow this one simple rule and you will avoid 99% of the scam attempts on the internet,
  • work with a trusted real estate professional that has obvious links to the community,
  • never send money to people or organizations that you do not know – anyone who asks you to do so could be a scammer,
  • craigslist is not involved in any transaction and does not handle payments, guarantee transactions, provide escrow services or offer “buyer protection” or “seller certification.” Neither are most of the other advertising web sites. When leasing or buying real estate, it is best you know with whom you are working,
  • never give out financial information (bank account number, social security number, eBay, etc.),

We remind you again – house buying is not a grocery shopping. Get yourself a reliable broker with experience and solid reputation. Take your time, the property is not on fire. Read everything twice and handle your signature like it was made of golds – do not place it anywhere. Do not hesitate to ask – it is our job to answer your questions.

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