Guidance for fending off real estate fraud

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A brief review of news stories related to mortgage fraud and real estate fraud shows there’s no shortage of schemes being uncovered and pursued. It’s not surprising. There are likely two main reasons for fraud schemes related to real estate being discovered at a high rate.

First, the crash of the real estate market made developers desperate and probably pushed more of them to engage in fraud in an attempt to keep their projects afloat. Second, the difficult market conditions probably forced to the surface some fraud schemes that otherwise would not have been discovered. During rough economic times, it’s not unusual for people and businesses to keep a closer eye on their money, and this probably led to the discovery of more fraud schemes.

Frauds related to real estate are often costly. The bigger the project, the more risk there is of fraud. What can those involved in real estate deals do to minimize their risk of fraud?

Use licensed professionals.

Whether we’re talking about a mortgage broker, a plumber, or a contractor, it is critical to do business with licensed professionals. The license itself doesn’t guarantee that the person is competent or ethical. But it provides at least a minimal level of confidence in the person or business. Consider the license to be a tool that weeds out the worst in the field.

Make sure that whoever is in charge of securing the service providers is ensuring that they’re licensed, and that they have the necessary insurance or bonding. This is a critical piece of the puzzle that should be in place from the very beginning.

Continuously monitor finances.

Obviously, there is massive risk of fraud in a real estate transaction as it relates to the parties in charge of managing the money. There is likely an investor or group of investors putting money into a real estate deal, and another party is charged with the task of overseeing the financial management of the project.

This leaves the door wide open for abuse, especially as it relates to the opportunity for the financial manager to reap personal financial benefits. It is important to take a critical look at the project and what has been completed, and compare that to what has been expended. It is even more important to make sure that the project manager hasn’t taken fees in excess of what has been earned on the project.

Examine third-party data.

Typically the best evidence in a fraud investigation is data that comes from an unrelated, unbiased third party. So for example, documents acquired directly from a bank would be considered very reliable as there is little chance of those documents being altered. The bank data can provide definitive proof of the spending on a project. This is an excellent source of reliable information.

If questions arise about the project and potential abuses, gathering documentation directly from subcontractors and vendors could also be helpful. Again, there is a greater chance that these documents are more reliable than internal documents, particularly if it is determined that the third party is unlikely to be involved in any malfeasance.

Get involved with the project.

To the extent that the business arrangement allows a party to interact with subcontractors and interested parties, she or he should take advantage of that opportunity. Investors are often very hands-off with real estate projects, and that’s not really surprising. An investor often does not want to be involved with the details of a real estate project. Unfortunately, that lack of involvement is one of the things that can precipitate fraud.

At the very least, those not involved in the daily operations of the real estate project should have someone checking on the finances of the project. This could be someone like a bookkeeper or auditor who makes periodic examinations of financial data. When people know that someone is keeping tabs on the money, it is less likely that they will commit fraud or malfeasance.

None of these suggestions are earth-shattering revelations. They are all basic control procedures that can reduce the risk of fraud in many different types of businesses. What they boil down to is active monitoring of a project to help ensure that some checks and balances are carried out to reduce fraud risk. Even if extensive monitoring isn’t possible due to logistics or finances, even limited ongoing monitoring of a real estate project can actively help prevent fraud. And if fraud does occur, hopefully this monitoring and involvement will help detect the fraud sooner.