Avoiding Fraud in Real Estate Transactions
With the implementation of electronic processes to complete real estate transactions, technology has changed how real estate deals are conducted. Titles can be searched and mortgages registered and discharged from our desktops. While technology has made lawyers’ work more efficient, it has left the door for abuse wide open as it is now easier for a fraudster to operate in the impersonal electronic environment. Further, real estate transactions are often “one-off”, where the lawyer has no pre-existing relationship with the client.
The two most common types of fraud lawyers may encounter are value fraud and identity fraud. Both are prevalent in real estate transactions, and so lawyers must be astute when dealing with either buyers or sellers so that they can prevent its occurrence. The former occurs when the value of a property is inflated, resulting in a third party advancing funds for a bogus purchase. The latter occurs when a fraudster facilitates the hoax by assuming the identity of another.
Several warning signs of a fraudulent transaction exist which can alert the lawyer and any innocent purchasers to a possible scam. The presence of these indicators does not necessarily mean a fraud is occurring, nor does the absence of these factors suggest a clean transaction. Professional judgement should always be utilized.
Some of the more popular avenues include:
- Clients paying with cash only
- Documents not being available (survey, purchase docs, etc.)
- Not using the same lawyer(s) for the purchase and mortgage
- Title searches revealing recent transfers of the property at much higher prices
- The Agreement of Purchase and Sale containing no amendments
- The deposit paid to the vendor (not the lawyer)
- No real estate agent is being used
- The client has not obtained fire insurance
- Clients willing to pay higher legal fees (even offers more $$$)
- Scheduling a closing for the Friday before a long weekend
These factors should be a red light to all property lawyers. Certain tips to prevent such fraud from occurring are:
- Obtain photo ID of borrowers and retain ID of the client in your file (professional requirement anyway)
- Obtain title insurance
- Question any unusual instructions
- Safeguard Personal Security Packages/Teraview passwords to ensure lawyers do not share them
As with most legal scenarios, ethical issues arise where a lawyer suspects his or her client of engaging in a fraud. The Rules of Professional Conduct clearly state that, in such circumstances, lawyers should discuss their concerns with their client. If unsatisfied with the explanation, the lawyer should withdraw from representation, citing a serious loss of confidence between the lawyer and client as the reason for doing so. Further, lawyers must only disclose the details of such fraud if such disclosure is permitted or justified under the Rules. In the unfortunate circumstance where a lawyer is duped by a borrower in a mortgage transaction, he has an obligation to notify any insurer or other indemnitor so that the lender’s protection is not prejudiced.
If you have any questions regarding this post, feel free to contact Mullun. You can learn more about Mullun at www.mullun.com.