What Legal Professionals Need to Know About Fraud Prevention in Real Estate

As a real estate lawyer or notary, your clients put their trust in you every day. It’s important to be in the know about fraud so you can better protect your clients from crafty criminals.

At FCT, we have certified fraud examiners on staff putting us way ahead of the competition when it comes to early detection and prevention. We also underwrite for fraud in our policies and provide protection against title fraud. Working together, we can all make a difference when it comes to fighting real estate fraud.

What are the different types of fraud in real estate transactions?

Title fraud and forgery

Real estate title fraud typically involves fraudsters using stolen identities or forged documents to transfer the ownership or title of a property to themselves. It then leads to mortgage fraud as they can take out a new mortgage on the property and disappear with the money or register forged documents to sell the property, discharge the existing mortgage (if one is outstanding) and then get a new mortgage against the property’s clear title. All while the original homeowners are completely unaware.

Mortgage fraud

There are two ways that mortgage fraud is perpetrated, but both include getting a mortgage from a lender under false pretenses. As mentioned above, when a criminal commits title fraud and then applies for a mortgage with a stolen identity, this is often referred to as mortgage fraud. But another common form of mortgage fraud is not committed by devious criminals at all. Also known as application fraud, this is when people misrepresent themselves on their mortgage applications, usually to qualify for a higher mortgage.

Value fraud

In this case, a fraudster either hides or intentionally misrepresents the property’s features and value. This leads the lender to believe a property is worth more than it really is and they offer a larger mortgage. If the mortgage goes into default, the lender is left holding a property that is worth less than the mortgage.

Shadow flipping

This type of real estate fraud happens when a realtor or investor sells the same property multiple times at increasing prices before the initial sale closing date. The initial seller ends up making less while the last buyer pays an inflated value for the property.

Foreclosure fraud

Unfortunately, criminals prey on the vulnerable. Foreclosure fraud is when someone approaches a homeowner who is in default on their mortgage and tricks them into transferring their property title either in exchange for a loan or for help with their mortgage. The fraudster imposes payments that are not sustainable for the homeowner (and doesn’t use the payments to pay off the mortgage) and they end up losing their property and equity along with it. The fraudster can then resell or remortgage the home.

How can you protect your clients from real estate fraud?

While you can’t prevent all types of real estate fraud from occurring, you can protect yourselves and your clients by keeping some fraud prevention tips in mind:

1. Whether you’re acting for a vendor or borrower, always insist that the balance of the proceeds are made payable to the registered owners after payment of secured creditors, taxes, legal fees, bank loans, credit cards, etc. and not to third parties. If the borrower or vendor owes money to a third party that does not appear to be related to the transaction, suggest they deposit the balance of the proceeds into their bank account and cut their own cheque to the payee. In most fraudulent transactions, funds are made payable to third parties, which allow the fraudsters to quickly negotiate the funds and disappear.
2. Be wary of very quick closings where you don’t know your clients.  Most fraudsters go to solicitors/notaries who don’t know them and if the transaction is rushed, they hope that many flags may go unnoticed. Make sure you compare the client to the identification provided.  This is especially important now, during the pandemic, as clients may be wearing masks during meetings or communication may happen virtually for the most part. Take all possible precautions to ensure you can compare them to the identification provided to you.
3. Question transactions being signed under power of attorney.  Why is the power of attorney being used and can you contact the donor? Review the power of attorney very carefully.
4. Read your lender client’s mortgage instructions in detail and make sure you comply with their fraud requirements.
5. Educate your clients about the different types of real estate fraud so that they can stay vigilant and protect themselves. Let them know that they should speak with you before giving anyone the right to deal with their assets so you can be their extra layer of protection.
6. To protect your clients against title fraud specifically, make sure they get a title insurance policy from FCT. Title insurance covers the cost of defending and restoring your title if it’s ever challenged in court as a result of a covered risk, in addition to offering other benefits to both lenders and buyers.

Insurance by FCT Insurance Company Ltd. Services by First Canadian Title Company Limited. The services company does not provide insurance products. This material is intended to provide general information only. For specific coverage and exclusions, refer to the applicable policy. Copies are available upon request. Some products/services may vary by province. Prices and products/services offered are subject to change without notice.

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