The following article is from Canadian Real Estate Wealth Magazine.
Fraud and investment scams abound at all levels of the real estate market – whether it be a contractor who charges hundreds of dollars for work not done to an “investment agent” who embezzles hundreds of millions – protecting yourself can require a measure of vigilance and legwork, but it can also come down to exercising skepticism and common sense.
1. Title fraud.
Although relatively rare, one of the most devastating frauds for property owners is title fraud. This type of fraud starts with identity theft. The scammer will use false documents to pose as the property owner, registers forged documents transferring a property to his or her name, and then gets a new mortgage against the property. After securing a mortgage or line of credit, the criminal takes the cash and leaves the owner on the hook for future payments.
While an identity thief may get a forced discharge of an existing mortgage, it is generally held that fraudsters are more likely to go after homes that are free and clear of mortgages: these have fewer complications and they tend to be held by older people who may be less aware about how to guard against identity theft. Criminal Services Intelligence Canada notes that homeowners who rent out their homes or who have no existing mortgages on high-value properties are more vulnerable to being targeted in title-fraud schemes as a large mortgage can be secured with the property.
Sale of a fraudulently held property may also occur, but it is much rarer as potential buyers are unlikely to consider a purchase without inspecting a property.
“Title insurance” is the best protection against this type of fraud. As well as protecting against title fraud, it also guards a new owner from against existing liens against a property’s title (such as unpaid debts from utilities, mortgages and unpaid property taxes), encroachment issues (a structure on a property needs to be removed because it is on your neighbour’s property) and errors in surveys and public records.
The other key to prevent being a victim is to engage in protection of personal data (see box). Taking precautions can also mitigate against more common types of identity theft –related losses (such as credit card fraud. As well as protecting their own information, investors and homeowners should ensure that trusted parties are taking proper security measures.
Canada’s Office of the Privacy Commissioner of Canada (OPC) launched a probe in 2009 after mortgage brokerages reported 14 data breaches in the space of a few months. Among the OPC’s findings: some brokers stacked files containing personal information on the floor or on desks within accessible offices; brokers lacked shredders capable of securely destroying documents; credit reports were sometimes obtained prior to consent from a client being recorded and there was no ability for clients to opt out of secondary uses of their personal information, such as marketing; there was a lack of training about privacy responsibilities.
In addition to title fraud by strangers, there have been cases where fraud has been perpetrated by spouses and business partners. For instance, one spouse may mortgage a property for their own benefit by using an accomplice to impersonate their spouse. Fraud can also occur through breach of an undertaking, where the lawyer or notary fails to pay off and obtain a discharge of a mortgage, instead absconding with the funds that had been intended to be used to pay an existing mortgage.
2. Foreclosure and home-equity fraud.
Criminals and criminal enterprises can take advantage of property owners who find themselves in a cash crunch, being short on funds for liabilities such as mortgage payments or other purposes. Two common scams that exploit a victim’s need for cash are foreclosure fraud and home-equity fraud.
The Financial Consumer Agency of Canada (FCAC) warns that foreclosure fraud occurs when a property owner who is having difficulty making mortgage payments is approached by a criminal offering a loan to cover expenses and consolidate loans, in exchange for upfront fees and an agreement to transfer the property title. However, in contrast to real debt consolidation programs, the FCAC says, the criminal will keep all the payments made by the owner and ignore bills and taxes. The criminal then remortgages the property and absconds with the money, leaving the former property owner without the home but still in debt.
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