It all started with a phone call from a real estate investor who called herself Janice. Janice was an investor on the east coast who was looking for more relationships with lenders to help her fund her real estate wholesaling business. She explained that she would buy property and resell it the same day for a marginal profit. She went on to explain that in the state of Virginia, she needed to close with cash on the deal before she could resell it and needed a loan for a day or two at most. She claimed that her normal lender would not be around on the day of closing and found us online. She needed to close in less than a week.
Flash cash loans are outside our company's normal scope, so I was going to consider funding this with my own personal cash. There were two properties, and the loans were $125,000 and $100,000. I would be paid 1.5% of the loan amount to lend the money for two days.
As I went through my diligence, I focused in on the title company. I reviewed the commitment and interviewed the closer. I looked them up online and verified their number and address. I also recognized the underwriter that would be issuing the title insurance policy. I reviewed the purchase agreement with Janice's buyer and did some diligence on them as a formidable real estate investor. Finally, I dug into the company that Janice was using as the buying entity and found that one of the members was a licensed attorney. I contacted him, and he assured me that this was a legitimate transaction. I agreed to make the loan.
It was about a week after closing that I started to get very concerned. The excuses continued, but the money with my fee never showed up. I called the title insurance underwriter to file a claim and was told they never issued the policy. I forwarded them the commitment and they explained to me that it was fraudulent and that they were unaware of the transaction. I got very aggressive in my pursuit of my loan funds. I explained to the title company that they would likely be pulled into a lawsuit, and they immediately got their attorney involved and made contact with the fraudulent closing title company. Their attorney sent the closer a demand letter, while I pursued my options. I hired a very aggressive litigation attorney, who immediately went after the attorney who was part owner of the borrower. He also contacted the title company, the closing company and Janice. Finally, I contacted the FBI.
Within a week of my full-on assault I received two wires for $225,000 each. Two! I was happy to collect all my loan fees, interest and attorney fees from the second wire they sent by mistake and quickly returned the balance. They were angry I took my fees, but their attorney made it clear to Janice and her fraud team to let it be. We were far too aggressive for them to deal with.
They fooled me because this was a very sophisticated fraud ring that I later learned had been doing this for years. I learned that they had a team in place to include the title company, the attorney who was part owner of the company, the owner of the subject houses, the buyer and of course the ring leader. Although she had photo identification under one name, it was later discovered to be an alias.
Obviously, I learned a lot from this experience. Most fraud attempts are not this sophisticated, but as sophisticated as it was, I still could have protected myself with some simple-to-implement steps. Certainly, fraud is on the rise. Here are a few ways to protect yourself, whether you are a new or seasoned investor:
• Verify the title company. This is especially important with smaller title companies. The best way to do this is to call the title policy underwriter directly to be sure they are working with the title company in question, and that they have issued a commitment. The title policy underwriter will be listed on the commitment. This is not a complete list, but the largest underwriters include First American, Fidelity, Chicago, Old Republic and Stewart.
• Verify the commitment. While you are on the phone with the underwriter, give them the commitment number, and have them tell you the address of the property, title agent and insurance amount. I have had mixed results with this, but I always ask.
• Verify wire instructions. This is probably the most common type of real estate fraud seen today. The fraudster will send you an email that appears to be coming from your real estate agent or the title agent with wire instructions and ask that you wire in the money for the closing. The wire instructions are inaccurate, and the money is gone forever. There are two ways to verify wire instructions: First, it is important to call the closing company and verify them over the phone. The second is to call the receiving bank and verify that the name on the account is the correct title company.
• Watch out for email hackers. If you get an email from someone from any of the free email providers like Yahoo or Gmail, be very careful. Title companies do not use these services. Also keep an eye on your own email account. Making the password very difficult to crack will go a long way, but be sure to also check your filters as often as you can. Once in, hackers love to set up filters to capture emails, so you never see your correspondence.
I recently heard of an attorney losing half a million dollars of their client’s money by not following anti-fraud procedures. Most fraud attempts are easy to spot, but some are more sophisticated. Real estate agents, attorneys, lenders, title companies and homebuyers (including real estate investors) are all targets. Follow these simple steps to protect yourself from real state fraud.
