At the outset of the pandemic, workforces across the country were required to transition to remote work with very little time to prepare.
While most businesses recognized the importance of digital transformation prior to the pandemic, the need to adapt to the technology solutions available – and in some cases develop new solutions – was significantly expedited by the circumstances presented by COVID-19.
While this evolution brings many benefits, it also perpetuates the fears that online processes could create more opportunities for fraudsters. In the real estate industry, the primary concern has been whether the new virtual nature of deals would introduce additional risk or new avenues for fraud.
There is no strong evidence, as of yet, to indicate that fraud has increased within the industry due to the pandemic and the increased use of digital solutions.
However, for the foreseeable future it is vitally important for real estate professionals and lenders to take the necessary steps to prevent and mitigate against the potential for fraud in this virtual environment.
In recognition of Fraud Prevention Month, we’ve provided an overview of some types of fraud and what to watch for to help stakeholders take the right steps to protect themselves and others involved throughout the real estate transaction.
Types of fraud
In order to understand how to prevent fraud, it’s important to first understand the most common types of fraud perpetrated on the real estate industry in Canada. These include:
- Title fraud: Occurs when the ownership or title of a property is fraudulently transferred, or documents are forged to allow a fraudster to illegally sell or refinance the property.
- Mortgage fraud: Occurs when an individual intentionally provides inaccurate, fraudulent or incomplete information to a lender in order to secure a mortgage for which they might not otherwise qualify.
- Value fraud: Occurs when a lender is led to believe a property is of higher value than it really is through concealment or intentional misrepresentation of the property’s attributes and value.
- Wire fraud: Occurs when a fraudster is monitoring a particular transaction and shortly before closing hacks into the email chain and amends wiring instructions for funds.
Perhaps more important than understanding different types of fraud is taking the precautions to prevent them. The below recommendations will help real estate professionals detect some of the common red flags involved in a real estate transaction.
First, always insist that the balance of the proceeds is payable to the registered owners after payment of secured creditors, and not to third parties. If the borrower 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 make payments from there.
Second, take all possible precautions to verify identity. Most fraudsters go to solicitors who don’t know them and try to rush the transaction in hopes that red flags may go unnoticed. Be sure to review the identity, age and income of clients, as well as the addresses on the application, including whether or not the buyer currently resides at the property they are purchasing.
Lastly, be sure to question transactions being signed under power of attorney. Forged powers of attorney can be used by a fraudster claiming to represent the owner of a property, so it’s important to review the power of attorney very carefully.
Consider title insurance
A title insurance policy protects residential and commercial property owners and their lenders against loss resulting from fraud within the transaction as well as some coverage for future fraudulent events. Differences exist between the residential and commercial coverages, particularly with respect to fraud that occurs in the future.
Title insurance companies are there to act as a second set of eyes and help to prevent fraudulent transactions by ensuring any red flags are raised and investigated by experienced and highly skilled underwriters.
Due to the vast volume of transactions they are involved in, some title insurance companies can provide the most up-to-date source of information on new methods of fraud attempts. And at a time when more and more real estate professionals are relying on digitization and virtual closings, it’s good to have that experience and expertise in your corner.
Real estate professionals and all stakeholders involved in a real estate transaction must do their due diligence to protect against fraudsters.
While digital processes and virtual solutions are becoming more advanced, professionals must remember that the sophistication of fraudsters is increasing as well. Underestimating their capacity to evolve and be creative could be debilitating for both their business and their clients.
At FCT, we take fraud very seriously and strive to both detect it and prevent it. We can also provide coverage for owners and lenders if it occurs. We’re invested in doing our part to help alleviate some of the worries that come from these uncertain times and encourage all real estate professionals to remain vigilant.
The more we work together as an industry, the higher the likelihood we can prevent and mitigate fraud.