In real estate, we’re still seeing numerous cases of wire fraud – and now we’re seeing some new types of fraud. In the past six months, we’ve seen some new scams affecting hundreds of homebuyers. These scams may involve fraudulent listings, fraudulent escrow companies, and fraudulent listing agents. Under these scams, the perpetrators have gone beyond anonymous cyber communication or hacking. They are setting up fake listings and fake escrow companies with ‘real’ people.
Here’s what to know to protect yourself, your clients, and your business.
A perpetrator on an existing escrow transaction typically poses as the buyer or the seller, with an email address very similar to the buyer or seller. The perpetrator then asks escrow to change where the proceeds will go, asks the buyer to send an escrow deposit to a bank account out of state, or even intercepts the real estate agent’s instructions to his/her clients.
We’ve seen cases where an escrow wiring sheet was changed between escrow and the real estate agent or between the real estate agent and the buyer. So when the buyer receives the wiring instructions, the buyer wires the funds to the wrong lending institution.
How to protect yourself from this type of scam? Rely less on email — and confirm escrow matters by phone and in person. It only takes a minute to make a phone call – but it could prevent the loss of millions of dollars for your clients.
Homes Not Really for Sale, Escrow Companies Not Really Escrow Companies, Listing Agent Not Really the Listing Agent
These new forms of scams are very sophisticated because they are not like the anonymous ‘email’ perpetrator. The home actually exists, the escrow company may have a physical address, and the listing agent is a real person with MLS information marketed to the public. The seller also ‘notarizes’ a deed. There are two main types of scenarios:
Under a listing scam scenario, there is a home listed for sale, unbeknownst to the real owners (who may even hold title in the name of a company). The deal involved is all cash at a very attractive price.
Under another scenario, the seller is seeking a hard money loan where little due diligence takes place. The unsuspecting buyer (or lender) is not allowed to see the property or take out a conventional purchase loan, and is offered the property at a fire sale (or a loan is made at a high interest rate). The deed is fraudulently signed by the perpetrator and once the transaction closes, the listing agent disappears.
Under an escrow scenario, a property is marketed on the MLS with a listing agent who may be licensed but does not work for a broker. (The listing agent may be part of the scam, or an actual listing agent’s own identity may be stolen and used fraudulently.) The listing is usually for a short sale at an attractive price, so that the buyer is not suspicious when escrow takes several months to close. At some point after the buyer deposits the funds in escrow, neither the buyer nor his/her selling agent can ever reach anyone at escrow or the listing agent again. The escrow company, the funds, and the listing agent all disappear.
What you can (or can’t) do about it
We won’t tell you there is a way to avoid all of these scams. The reason is twofold: First, as real estate agents, you can’t conduct yourself as if all other parties are out to defraud your clients. You are not gatekeepers of fraudulent activities. Second, any advice we give will run the risk of unfairly raising the standard of care for real estate agents and brokers.
But there are two suggestions to consider:
Don’t let your buyers be tempted by the ‘deal of the century.’ It’s not necessarily a red flag, but there is no such thing. A buyer should be encouraged to conduct all possible due diligence including: inspecting the property, talking to the sellers, checking the broker and escrow licenses, and even doing internet research on the companies involved. There is a lot of information available if we just look a little deeper. If possible, try to use escrow companies with whom you are familiar. Even if the escrow company is not fraudulent, there is no reason not to use a properly licensed and bonded company, preferably your own broker-owned escrow. Stated differently, no deal is worth giving up your buyer’s due diligence!
Check your insurance with your real estate E&O insurance specialist (like CRES). Many of these schemes are not covered by typical errors and omission insurance (especially if you have a more general E&O policy, rather than E&O customized for real estate like CRES). You may need a cyber policy or a crime policy – even as an individual agent. Make sure you understand what is included with any insurance you purchase, and speak to your insurance company about your needs and concerns.
We recommend the purchase of a crime or Cyber Liability policy to help protect from liability that may occur as a result of these criminal activities, which we can obtain for you. There is only limited coverage for theft and fraud in an E&O policy.
CRES E&O offers Data Breach Notification coverage of $50,000 within many of its policies as part of the Broad Form Coverage Endorsement. This coverage can be used to hire experts and notify clients of a data breach as is required by most states, even if a laptop or phone with client contact information is missing. We also have a new Cyber-Liability endorsement to give you more robust coverage for damages resulting from a cyber crime, but it is designed to help you recover from ransomware or other attack on your system; not the liability from fraud or theft that occurs to clients. The average direct cost of a data breach is $2,300,000, with the average additional cost of lost business being $3,900,000. With all that at stake, it’s vital to review your policy and additional types of insurance available through CRES to ensure you’re covered on all fronts.
Ms. Erlich is a professional liability defense attorney specializing in defending real estate professionals including, real estate brokers, escrow officers, appraisers, and design professionals. Graduate of Tel-Aviv University (BA 1992, magna cum laude), Whittier Law School (JD 1997, magna cum laude) and California State University (MA, Philosophy of Law 1998). In the last 18 years she has defended many professionals through trial and appeal. Ms. Erlich is a member of the Real Estate Executive Committee of the California State Bar and a member of the Legal Affairs Forum, California Association of Realtors. She is a Specialized Litigation Group chair and she is on the steering committees of several Defense Research Institute groups, Professional Liability Underwriters Society Southern California Chapter, and the Southern California Chapter of Claim and Litigation Management Alliance. Ms. Erlich is a recipient of Rising Star and Super Lawyers awards, and is an author and frequent speaker on professional liability topics. Ms. Erlich is a former Israeli Defense Force officer and a mother of 4 children.
This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.
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