5 Types of Mortgage Fraud | Nexus Property Management® Franchise

17 April 2024

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THE FIVE MOST COMMON WAYS SHORT-SIGHTED INVESTORS BREAK THE LAW IN TRYING TO BEAT THE SYSTEM

Real estate investment is the best way to create generational wealth, especially with a professional property manager in your corner. Because the opportunities to generate great capital abound, there’s also the tendency for some to bend or break the law in their pursuit of greater profit. Mortgage fraud might not seem like criminal behavior to some but the penalties are stiff. According to the United States Sentencing Commission, 87.1% of those found guilty of mortgage fraud had little or no prior criminal history and 87.7% were sentenced to prison with an average sentence length of 28 months. There is plenty of upside in real estate and there’s zero justification for going down that road. Here is a list and explanation of the five most common schemes short-sighted investors turn to.

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5 TYPES OF MORTGAGE FRAUD

1. OCCUPANCY FRAUD

Occupancy fraud is a federal crime that many people might view as more of a little white lie. When you apply for a mortgage and misrepresent your intentions by claiming that you’ll be occupying the property when you actually do not, you’ve broken the law. This is most typical for FHA loans where the borrower is representing themselves as a first time buyer in the aims of securing just a 3.5% down payment. There is no “mortgage police” out there patrolling, but there are tell-tale signs of occupancy fraud that can raise red flags. Is your mail delivered there? Are the utilities in your name? What does it say on your Insurance Declaration? Did someone report you perhaps? Odds of getting caught are not especially high and for that reason the penalties are exceedingly steep as a means of dissuading people from going this route.

LEARN MORE: MORE ON OCCUPANCY FRAUD

2. STRAW BUYER

A potential borrower who may not be creditworthy or has some significant disqualifier might use a straw buyer to help secure a loan. The straw buyer is someone who doesn’t really want to own the property but instead acts as a clean face for the borrower. This person will have good credit, good income, and will deceive the lender for the benefit of the potential property owner. Someone with bad credit, a foreclosure, federal debt, outstanding judgments against them, or are party to a lawsuit may be driven to circumvent the lenders’ screening process by paying a straw buyer. Purchasing a home under false pretenses is illegal.

LEARN MORE: MORE ON STRAW BUYER MORTGAGE FRAUD

3. ILLEGAL FIX AND FLIP

Illegal fix and flips were more common when foreclosures were at record highs in and around the housing bubble that burst in 2008. The more recent steady raises in interest rates have made the fix and flip market less attractive, but then again, the reason people turn toward criminal behavior is typically because they feel the need to bypass the reality of circumstance. Flipping houses is legal as long as it’s done honestly. Illegal flipping involves multiple parties conspiring to get a property sold and bought at a low price to then sell and create an artificially large profit. This could include a foreclosure being given to a builder at a really good price and then an appraiser coming in and providing a biased opinion on the value of the property. Together, they’ve gained possession of the property on the cheap and elevated its value illegally and will then share the profits…and the risk, as the United States Department of Justice has been aggressive in pursuing illegal fix and flips.

LEARN MORE: MORE ON HOUSE FLIPPING AND WHEN IT TURNS ILLEGAL

4. NON-ARM’S LENGTH TRANSACTIONS

Similar to the illegal fix and flip, this brand of mortgage fraud also includes collusion. Simply put, two parties in the transaction have a relationship that is not disclosed and it is used to alter the deal. It could be a casual request from a listing agent to a friend, who is an appraiser, about the assessed property value he’s expecting, for example. Real estate professionals shouldn’t be talking in that regard and need to disclose relationships ahead of time. Sunbelt states like Arizona, where Nexus Property Management® recently opened its locally owned and operated office in Tempe, are attracting lots of out of state real estate workers, but in most parts of the country, the real estate community is relatively tight and people know those in the business pretty well. Disclosure and honesty is important and the legal standard.

LEARN MORE: MORE ON ARM’S LENGTH TRANSACTIONS

5. INCOME FRAUD

When attempting to secure a loan, potential borrowers will typically rely on their credit reports and income to show their credit worthiness to lenders. As we’ve discussed in the past, credit scores are not as impactful when applying for a mortgage for an investment property, but banks still want to see that you’ve had steady income at a certain level for at least two years. People who lie or misrepresent how much they make are committing income fraud. They might add a large sum of money to their account, typically beyond 2 months so it can be considered “seasoned” and report it as income that wasn’t on their tax return. More commonly, people might use technology to doctor pay stubs or falsify other documents. Regardless of the tactic, income fraud is illegal and easy to prove.

LEARN MORE: MORTGAGE FRAUD: WHAT YOU NEED TO KNOW

LEARN MORE: DOES YOUR CREDIT REPORT MATTER WHEN BUYING RENTAL PROPERTIES?

NEXT STEPS

It’s Nexus Property Management’s goal and responsibility to help educate property owners and prospective property owners for the sake of improving investment opportunities for all. We want more and more people to take advantage of these opportunities but we also want to see them play the game the right way. When it comes to investing, you need to take the high road: it’s slower, it’s harder, and it’s more expensive, but it’s going to get you to a better place. Your investments will grow, especially with a reputable property manager on your side, and you won’t have to deal with the stress and negative ramifications that come with operating outside the law.

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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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