A sign advertises a new home for sale in Carleton Place, Ont. on Tuesday, March 17, 2015. The Bank of Montreal is cutting its posted five-year fixed mortgage rate, a move that experts say could spur other banks to slash their rates as well as the spring real estate season begins. THE CANADIAN PRESS/Sean KilpatrickSean Kilpatrick/The Canadian Press
Eight years ago, back when Laura Kemp began her career as an appraiser, her father-in-law, also in the business, shared one of his weirdest home visits.
The bank once sent him to check out a bungalow on a 20-acre lot outside Winnipeg, requiring a full appraisal before it would release the funds for a mortgage. But when he arrived there after hours of driving, he was in for a surprise.
"There was no house on the lot," says Ms. Kemp, owner of Winnipeg-based Kemp Appraisal Ltd. "Now that's mortgage fraud."
Indeed, there are all kinds of ways unethical home buyers and sellers dupe their way into a bigger mortgage or better selling price. Whether driven by greed, desperation or opportunity, fraudsters have been caught doing everything from inflating salaries on mortgage applications to posing as a legitimate property owner, taking out numerous mortgages and fleeing with the cash while the real owner is left picking up the pieces.
Yet there's another real estate scam that tends to fly under the radar, but can still have serious ramifications: mortgage valuation fraud.
Also known as appraisal fraud, it's used to artificially and deliberately raise a property's value by having it appraised above its market value. In some cases, an appraiser is in on the con, but more often their report is tampered with after the fact, without the appraiser's knowledge. Sellers are either trying to convince buyers the house is worth more than it is or the buyer is fudging numbers to make it appear the home is a great deal, thus less risky for the lender.
Value fraud tends to be easier to pull off in hot markets when house prices are skyrocketing, and an unexpectedly hefty price tag seems genuine. What's more, buyers who are worried they will be outbid on their dream home – again – might be loathe to ask for independent appraisal reports, even if they have a niggling feeling the current appraised price seems unnaturally high.
"If I'm in an overheated market and want to make a deal, that's a situation where fraud is more likely to happen," maintains Keith Lancastle, chief executive officer of the Appraisal Institute of Canada in Ottawa.
While there are no hard numbers and national statistics tracking how prevalent this particular type of fraud is in Canada, back in 2012, Equifax, the consumer credit company, released a report stating that two-thirds of all fraud uncovered that year was real estate related, at $400-million.
That might just scratch the surface of Canada's $1-trillion-plus mortgage industry (and again, it reflects only illegal dealings that came to light), but the problem may have gotten the lenders' collective attention. Ms. Kemp says many of the big banks and credit unions have put new guidelines in place to eradicate bogus reports.
Want to show your appraisal to the Bank of Nova Scotia or Toronto-Dominion Bank when applying for a mortgage? Sorry. It's got to come directly from the appraiser's e-mail account now.
"Obviously they've seen enough cases of appraisals being altered to put that new rule in place," she says.
Raymond Leclair, vice-president, public affairs at Lawyers' Professional Indemnity Company (LAWPRO) in Toronto, with 25 years as a real-estate lawyer, says fraud goes underreported, partly because financial institutions consider the risk part of doing business.
"They'd rather lick their wounds until it gets out of hand," he says.
Unfortunately, the cost increases as organized fraudsters turn to house "flipping" to falsify home values and make big money. They buy a cheap home in a good neighbourhood for, say, $200,000, turn around and sell it to a buddy for $250,000, who then sells it again to someone else on the take for $300,000. Eventually, the house gets unloaded on legitimate buyers for an inflated price and they have no idea they have just overpaid.
No one wants to be that person, so it's not a bad idea for potential buyers to get their own full appraisal, which includes a three-year sales history.
"If you saw bump, bump, bump on the subject property, that would certainly raise a red flag," Mr. Landcastle says.
WHAT TO LOOK OUT FOR
While most appraisals are requested by banks and lenders, about 10 per cent are requests from individual buyers, says Laura Kemp, owner of Winnipeg-based Kemp Appraisal Ltd.
Experts advise potential buyers, especially those participating in private sales, to stay sharp and cast an eagle eye over details to help protect them from mortgage value fraud.
Quantity counts
You've fallen in love with a house back-split in a child-friendly neighbourhood and the private sale is going ahead just fine and the seller gives you the one-page report. Wrong. "That's not an appraisal report," Ms. Kemp says, explaining it should be about 10 pages long. "Why haven't they given you the entire report? Ask for the whole thing." And don't forget to look for the appraiser's signature.
Best before date
Appraisal reports are only relevant for so long. A neighbourhood or whole city's real estate landscape can change quickly (such as Calgary recently) and that old appraisal might be out of date. The general rule? If it's more than 90 days old, it's time for a new appraisal. That is usually the lenders' rule, too.
A trifecta of trickery
When reading an appraisal report, look at the effective date – and the appraised value – wherever they appear, usually at least three times in a report. Ms. Kemp says that fraudsters might forget to fudge the numbers and dates all the way through the document. "They change one, but are not smart enough to see it's there more than once."
Know whom you're dealing with
Cases across the country these past few years have revealed criminal rings engaging in mortgage fraud schemes, which included lawyers, bank employees and mortgage brokers. Get references from friends and family for real-estate professionals. "You always have to ask yourself, 'Okay, who stands to benefit from this transaction going through?'" Mr. Landcastle explains. "Will they cross that legal or moral line to make it happen?"