As the housing market remains tight, experts say real estate fraud is on the rise in the US.

• Real estate professionals say they have seen a spurt in housing frauds in the last one year.
• This is resulting in tight conditions which is causing desperation among both buyers and sellers.
• Some experts say they expect the situation to worsen as market dynamics continue to change.

When victims of fraud contact Mark Berman, an attorney at Ganfer Shore who frequently deals with real estate fraud cases, they are often distraught. Many of them were close to closing on a property when they received a legitimate-looking email or text asking them to pay a chunk of money to complete the deal.

It later becomes clear that the request was sent by a fraudster, part of a wave of similar scams looking to take advantage of frustrated home buyers and sellers transacting in a difficult market.

Berman and other industry professionals told Insider that real estate fraud is on the rise, a trend being fueled by tight market conditions. Experts say that with high interest rates and anemic transaction volumes, homebuyers, sellers and brokers are often trying to close deals as quickly as possible, and this can leave scammers easy.

Analytics firm CoreLogic found that the risk of property fraud, in which a seller misrepresents information about a home on the market, increased 23% in the second quarter of 2022 compared to the previous year.

Wire fraud – when a fraudster extorts money from the buyer at some point in the transaction – and title fraud – in which a scammer transfers the title of a property to an illegal third party – have also cropped up.

According to data from FundingShield, transactions where wire and title fraud were a risk factor reached an all-time high in the fourth quarter of 2022, with slightly more than half of all transactions containing potential signs of wire and title fraud risk . FundingShield told Insider that the risk of this type of fraud nearly doubles in 2021.

Although Berman said it was difficult to estimate an exact number, he says that real estate fraud cases have increased “exponentially” in recent years, adding that his clients often include home buyers, brokers and real estate attorneys. Although some of their clients are industry professionals, they also fall into the trap set by fraudsters because of how clever some of the scams have become.

“Some scams are great,” Berman said. “The scams are becoming very sophisticated and real estate agents, brokers, they’re not catching up.”

Why is this happening?

There has been an increase in fraud at a time of changing dynamics in the US housing market.

Rates on 30-year fixed mortgages rose by the pandemic to 7% in late 2022 and have been hovering near that level ever since. Meanwhile, home sales, housing starts, and new home listings slumped last year, leading some experts to warn of a housing market crash that could lead to a sharp correction in home prices.

But while some potential buyers have been sidelined, those in the market are increasingly desperate to close, with experts saying there has been a rise in questionable deal-making.

According to CoreLogic’s head of industry solutions, Bridget Berg, it’s becoming harder for people to sell homes as borrowing costs remain near record highs. This has helped in driving high cases of property frauds.

According to Ike Suri, CEO of FundingShield, wire fraud has increased for similar reasons. Higher interest rates and sluggish housing activity create more pressure for real estate professionals to close the deal, which may mean they aren’t properly verifying whether an email or text is from a legitimate sender.

“The chaos makes it a perfect time for cybercriminals to take advantage of these, especially in the housing industry,” he said, adding that every transaction between parties is an opportunity for a fraudster to strike.

“They are exposed to phishing, hacking, spoofing, to name a variety of schemes.”

Berg told Insider that he expects to see an increase in mortgage fraud in the coming years, with CoreLogic’s National Mortgage Application Fraud Index rising 30% from its low during the pandemic. The index is a predictive tool that currently suggests a 30% higher risk of fraud in mortgage applications.

Kip Madrigal, a partner at Locke Lord who often deals with real estate fraud cases, told Insider that he too is expecting an increase in scams, though it is also contingent on housing demand and other market conditions.

He estimates that fraud could increase by 20%-25% over the next few years if the market remains tight.

Shifting market dynamics have left experts divided over where US housing goes from here. The Fed is expected to cut back on higher interest rates later this year, which could affect the decline in mortgage rates.

Nadia Evangelou, chief economist for the National Association of Realtors, previously told Insider that she believes lowering interest rate expectations will help the market avoid a crash. She said housing sales are likely to bottom out in early 2023, with the year overall proving to be a “turning point” for the market.

Source: markets.businessinsider.com