6 Real Estate Scams Every Consumer Needs to Know About

Common real estate scams | @cosmictimetraveler via UnSplash

A quick disclaimer on real estate scams: Every type of scam referenced in this article I have either seen happen or have heard about from sources I deem reliable. However, it is possible that some of the real estate scams presented below did not actually play out in the real world exactly as they are written. Also, I use examples when describing many of the scams so that they are easier to understand.

My definition of real estate scams is broad: In my opinion, a real estate scam occurs anytime someone is treated in a dishonest or unfair way during a transaction. If you are interested in learning about other types of scams in a real estate transaction, please visit this page on usa.gov.

Common Real Estate Scams

Real estate scams are a dime a dozen. Perhaps it is the way I am wired, but I hate to see anyone get swindled. I wrote this article so that you, a buyer or seller of a home, can learn about some of the shady things to look out for. The list below only includes a select few scams from the brokerage side of the business. However, there are countless real estate scams out there. As noted above, there are moving scams, mortgage scams, etc. If you have any concerns, always reach out to a licensed professional in the applicable field, regulatory board and law enforcement agency.

One last thing, I live and work as a licensed real estate salesperson in the State of Massachusetts. My experience is limited to my work in the field. In other states, other types of real estate scams are more common. For example, I presume scams related to mineral rights occur more frequently in the Midwest than they do in New England. A qualified real estate agent should be familiar with the various common scams in your local market. If you have any further questions, please feel free to leave them in a comment at the end of the article.

Offers to Capitulation

This is an interesting real estate scam. The way it works is pretty straightforward: The goal here is to change a seller’s acceptable offer threshold through reinforcement of lowball offers. If that sounds complicated, I assure you it is not.

For example, let us say a home has been on the market for 30 days. The asking price is $1,000,000. Joe, a buyer, wants to buy the home. However, Joe only wants to pay $850,000 for it, a 15% discount. That’s pretty rare in this seller’s market, and Joe knows it. So, he comes up with a nifty strategy.

Joe tells Uncle Harry and a few other shady characters to throw in various offers, all below $850,000. So, over the next few days, each of Uncle Harry’s friends put in various offers. One offer is $825,000, another is $810,000 and perhaps another is $795,000. Pretty soon the seller gets agitated. They think, “Perhaps we listed our home for too high a price. Maybe it is only really worth what these people are offering.”

Then Joe comes around and offers $850,000. The sellers think, “What a great offer! We will take it.” Granted, Joe’s offer may have been the only one at that price. But, perhaps there were other people interested in the home and did not bother pursuing it because they thought what they would offer, $875,000 or 900,000, would have been an exercise in futility.

In the above case, the solution is to always derive value from factual and legitimate methods. If a comparative market analysis (CMA) shows that a property is worth X, then an offer of X-Y should be met with skepticism. Also, a seller should decrease the price of a home at preset intervals for set amounts, otherwise they leave themselves exposed to psychological wear by low ballers, tire kickers and schemers like Joe and Uncle Harry.

Technically Not a Net Listing

Of all of the common real estate scams, this one drives me bananas more than any other. It is an absolute travesty that it still occurs in the 21st century, but tools like Zillow’s Zestimate and a more straightforward sales process have fortunately made it easier for sellers to learn the true value of their home, and consequently avoid this scam.

In real estate brokerage, there is such a thing as a net listing. A net listing is where a seller tells an agent they want X for their home, and everything over X the agent can keep as their commission. So, if a seller wants $400,000, and the agent lists and sells the property for $500,000, the agent clears $100,000. As you can imagine, this type of listing agreement leads to outright fraud as agents can convince sellers that their home is only worth a fraction of what they can sell it for. In other words, an agent has competing interests. The first is to get their seller the highest and best offer, while the other is to convince their seller that their home is worth as little as possible.

In the State of Massachusetts, net listings are illegal. I have been told they are illegal in most other places, as well. But, sneaky agents operating in the gray zone have come up with ways to get around these laws.

Here is how this real estate scam may work in the real world. Say an older woman, Dorothy, wants to sell her charming Queen Anne home. She does everything by the book and therefore asks an agent for their opinion of value. The agent tells Dorothy that he believes her home is worth $1,400,000. Dorothy trusts him and agrees with that listing price.

Before the agent lists her home, he offers to buy it from her for the full asking price, $1,400,000. Or maybe he is a little smarter and to distance himself from the transaction he says that Uncle Harry, a friend of his, will buy the home for full ask. Dorothy, happy to receive what she believes her home is worth, quickly sells to Harry. Worst of all, she thinks the transaction has gone great.

Six months later, when scanning the local paper, Dorothy learns that Harry flipped the house for $1,800,000. Maybe Harry gave the seller’s agent 100k for turning the deal onto him. Maybe Harry greased his palm in another way.

Was this deal fair? Dorothy’s agent says so. After all, Harry had to hold onto the home for six months. The agent says, “Anything could have happened during that time! I took a lot of risk.” To be fair, in theory he is right. It is possible that things could have gone wrong, but not probable.

Therefore, her agent is also wrong in a few ways. The amount of risk taken is very low when compared to the potential profit. Consequently, if the home were listed on the open market, it is very likely other buyers would have offered more, probably much closer to $1,800,000. More importantly, the seller’s agent generally cannot represent the seller’s interest when dealing with a close family member, or any buyer who brings him into the deal. This is because it leads to competing interests for the seller’s agent, as noted above.

Sometimes Harry is even smarter. He negotiates an option on the home or incorporates an extended closing into the offer. So, he might tell Dorothy, “Here is $5,000 to keep you comfortable. Give me six months to close on the property.” Although in a standard options purchase, Harry would work hard to add value to the home (get various permits, etc.) in the six-month period, in this case he simply tries to find someone to flip the lot onto. The loss of $5,000 represents a paltry risk when he can reasonably expect to make hundreds of thousands on the flip.

The solution to this scam is pretty simple. The first step is to always get multiple opinions of value on your home. Second of all, if your agent decides they may be interested in purchasing your home, ask them to recuse themselves from representing you in the transaction, and hire another listing agent.

Above all, if a trustworthy agent is interested in buying your home, he or she should recuse themselves from signing an exclusive listing contract long before offering the form to you. Last and most important, never agree to dual agency, which is where an agent represents both the seller’s and buyer’s interests. It is not ethical or reasonable, and should have been outlawed long ago.

Last Minute Switcheroo

I saw this scam originate at the beginning of the COVID lockdown. Many people were fearful that a housing crash was imminent and some buyers used that panic to put the squeeze on sellers.

When a buyer makes an offer in Massachusetts, they make two separate deposits at two different times, to the seller. The first is due with the offer, and the second down the road at the signing of the Purchase and Sale agreement (P&S or PSA). A buyer may put down a flat fee, say $1,000 with an offer, and then 5%-initial deposit of the purchase price at the signing of the P&S. 5% is a common amount in my area and is what led to this scam functioning so well for buyers.

The scam works as follows. In this example, let’s remove the buyer’s and seller’s agents to make it easier to follow. Say a home is listed for $975,000. It’s a seller’s market, and a buyer comes along and offers $1,000,000. They offer $1,000 down with the offer, and $49,000 at the signing of the PSA, a week after the initial deposit. The buyers seem legitimate, they have the money, have a good reputation and have waived many of the usual contingencies. So, the seller accepts their offer. So far, all is good.

Two months later, the seller has moved out and has put down a deposit on a nice condo near Cocoa Beach. A few days before the closing, the buyer gets cold feet. He calls up the seller and says he will still buy the house, but a price reduction is needed… A big one… “How about $100,000?” The buyer then adds that if the seller does not accept this reduction, they will not sign a release on the deposit funds (5% or $50,000). Even though the seller is entitled to these deposits, the buyer threatens to sue them to get them back.

The seller is now in a bind. They can take the $50,000, if whomever is holding it agrees to let it go to the seller. Consequently, that would mean re-listing their home and potentially losing their deposit on the condo in Cocoa Beach. And of course, the buyer may end up suing, causing a headache for the seller. The alternative is to cater to the buyer, or try to negotiate with them to get a smaller price drop.

By now, the seller has lost almost all of their negotiating power and a lot of credibility. The buyer knows they have them in a bind. Some nifty buyers may ask for even more concessions before closing.

The solution here requires two parts. First of all, insist on a higher deposit at the PSA. COVID proved to us that doing things the old-fashioned-way (such as putting down 5% at the PSA), was not enough. I now recommend 10%. Remember, most mortgages require that a buyer put down 20% or more. More often than not, is not unreasonable to ask a buyer to put down half of that at the signing of the PSA. The more a buyer puts down, the less likely it is that they will threaten to walk away. Second of all, make sure a respected real estate agent and attorney review any offer to confirm that there are no loopholes.

“I’ll Pay Assessment”

City or town Assessments are not always accurate. Sometimes a developer will offer the assessment on a home, and an unsuspecting homeowner will accept. Or a developer will offer 5, 10 or even 20% more than the assessed value, and use the assessment as evidence that they are making a strong offer.

In fact, assessments can be far off actual value. Remember, assessments are used for tax purposes. For example, homes in my area often sell for hundreds of thousands of dollars over their assessed value. Most homes listed at their assessed value generally need substantial improvements.

In fact, in Massachusetts, due to Proposition 2.5, many city’s and town’s total property values go up faster than the combined assessments can legally be raised. As a municipality’s expenses go up, overrides and debt-exclusions are often proposed.

Therefore, to avoid this common scam, hire a real estate agent that can determine the value of your home. One method to determine value is to run a CMA. However, a reputable agent should know whether a home will appeal to developers or end-users (or both), as developers often use different formulas to determine value.

In other words, a piece of property may have a higher value to a developer. In which case, a skilled agent will determine its current worth on the value of the newly-developed land minus construction or renovation costs, and a typical builder’s profit.

Friend at City Hall

Say you own a nice lot of land in the center of town. The bad news is that the old farmhouse on the site has recently been declared uninhabitable. The good news is that the land is valuable. Really valuable. In the past, a few developers have offered you around $300,000. But just yesterday another builder said that a buyer could subdivide the land and build two two-family homes.

Consequently, because the builder sees value, he offers you $400,000. You think, “Fantastic!” Not so fast. Uncle Harry tells you to check with his friend Bill at City Hall to confirm that the builder is allowed to implement his plan for the land. Uncle Harry wants to make sure the builder is not a tire kicker that will back out of the deal at the last moment.

So, you call Bill. Bill agrees, four units is allowed by a special permit, which the builder is likely to get. But, Bill says there is no guarantee that the builder gets the permit, and he may end up only being allowed to replace the current home. He hints that the builder’s offer is a good one. You thank Bill for his time and take the offer. You just got scammed.

Of course, this type of deal is not always a scam. Sometimes a seller wants to sell a lot quickly and trusts the person making the offer. In the above example, perhaps the builder truly wants to build four units. Or maybe the builder wants to build eight units, or 12 units.

Six months later you are driving by the now demolished farmhouse and see a sign, “Coming soon. Mixed-Use development. 2,200 sq. ft of office space and eight new luxury condos. Condos starting at $300,000.” You quickly realize that the land had far more value than you were led to believe.

To avoid this scam, always consult with a local real estate attorney who specializes in land use before selling a piece of developable property. In fact, I would recommend checking with a couple of attorneys just to be sure. After all, commercial real estate (CRE) deals always hinge on the ability of a buyer to make a profit. If the chance of getting approval for a developer’s preferred buildout is high, and the builder stands to make millions on it, the land, even without a permit, still has significant value.

On the flip side, never assume that because someone told you X has a good chance of being approved on your property, that X is guaranteed. Many developers take on a big risk when buying a speculative property, and to make the risk worthwhile, they may make you an offer lower than what you consider is fair. A real estate agent that specializes in CRE should be able to help you determine the market value of your developable land. 

Using One Offer to Generate Others

This is a common tactic employed by seller’s agents. Essentially, an agent will use one person’s offer to bring up all other interested parties’ offers.

For example, say a home has been on the market for 100 days. The asking price is $1,000,000. There is a Sunday open house and you and your wife attend. You are told by the listing agent that there are no other offers on the table. So, the next day you sit down with your agent and draft up an offer for 950k. You think this is a strong offer and expect it to be accepted. You leave the offer open for 48 hours. After all, the sellers are elderly and you want to give them time to review it.

The next morning the seller’s agent calls your agent. There are now two other offers, and one of which (not yours) is “very strong”. The seller’s agent tells your agent that if you want the house, you need to offer full asking. You question how this is the case, as the home has been on the market for more than three months.

Here is what may have happened. Often times, when a home is on the market for an extended period of time, the home gathers a few semi-interested parties. But, many of them do not pull the trigger for a number of reasons, usually they would offer far lower than the seller is considering taking, so they do not bother wasting anyone’s time.

When you, a new buyer, come through and make an offer, the seller’s agent picks up the phone and calls anyone who has expressed interest in the past. Once one person hears that there is an offer, they get excited and make one too. Interest from one drives interest from another, and before long there are many offers. I have seen this happen countless times.

This is not to say the seller’s agent is doing anything wrong. After all, it is their job to get the seller the highest and best offer. If you have offered a seller $950,000 for the next 48 hours, they may as well see if anyone else will offer more during that time.

As a buyer, this process can be immensely aggravating. Sometimes, buyers think that the sellers went with another bid because the seller’s agent slighted their offer. Perhaps this is because the seller’s agent offered to reduce their commission as the other buyers did not have a buyer’s agent. In other words, the seller’s agent pushed the other offer because they could get a larger commission.

Or, perhaps they passed on the buyer’s offer for more ominous reasons. On occasion, one of these more questionable situations may have occurred, and that is why your offer was passed on.

However, there is an easy solution to avoid this problem. First and foremost, in a situation where a home has been on the market for a long time, sellers serious about unloading their property will offer to review an offer in a timely fashion. If they are away or request extra time, ask to submit your offer when they are ready. If sellers want some time to review an offer, or sleep on it, give it to them in the evening and make it good until 9am the following morning.

Also, If the sellers want their attorney to review any offer, give the terms of your offer without the offer price for the seller to approve. Once their attorney has had time to review and approve the terms, then send over your offer with the purchase price. Simply put, don’t show your hand too early.

In the age of electronic signatures and fast communication, there is no need for 24-hours to review an offer. In cases where a home has been on the market for an extended period of time, sellers should know roughly what will constitute an acceptable offer. However, even if you limit your offer’s duration to a period of 12-hours or less, the seller’s agent could still call other interested parties. It’s not foolproof.

Consequently, if sellers want to take their time to respond and my buyers still want the home, I advise them to make their best and final offer upfront. That way, if they do not get the home, they will not feel bad about losing out on it. A seller has no obligation to go back to you, or anyone else, for a best-and-final offer, even if you sent a nice letter with your initial one.

Why Smart People Fall for Real Estate Scams

Real estate scams are easy to fall for because they are often presented to us by those we are led to trust, such as real estate agents, attorneys, neighbors, friends and coworkers. The good news is that there are many ways to avoid these schemes and maximize the sale price of your home, or minimize your purchase price in the case of buying a home,

The purchase and sale of real estate will likely be the largest financial transaction in your life. If you ever suspect that something is going wrong, hire the appropriate licensed professional to work on your behalf. If you are still unsure, get a second opinion. Never assume that everything will work out and that people will do the right thing.

How to Avoid Falling for Real Estate Scams

There are three straightforward things you should do when buying or selling real estate to protect yourself from, and minimize the risk of, falling for a real estate scam.

Hire a Real Estate Agent

Hire a licensed real estate agent, preferably one that is a member of the National Association of Realtors. NAR members have the follow strict ethical requirements. Make sure to interview a few real estate agents before choosing one. You can read my article (How to Find a Real Estate Agent – The Ultimate Guide) to learn more about what to look for when hiring one.

Hire an Attorney 

As real estate contracts are often complex, a buyer or seller should always hire a real estate attorney, specifically one that has experience in the area where the transaction will take place. A competent attorney will be able to review any contracts, among other services, and work with your agent and you to make sure nobody is trying to play any games.

Listen to the Advice of the Professionals You’ve Hired

You can hire an agent and attorney and do everything by the book, but if you ignore their advice, then you open yourself up to an undesirable outcome. I have seen far too many intelligent people fall for real estate scams simply because they thought they knew more about real estate than those they hired to assist them.

For example, sometimes sellers want to list their home at a price far higher than I have determined their home’s market value is. Generally, I ask these sellers to only try this higher asking price for a short period of time, then quickly bring down the price to a more reasonable level. But, sometimes they resist.

More often than not, these sellers, frustrated that they have not received interest at their unreasonable price, tend to blame their agent. Pretty soon, the only interest comes from low ballers and tire kickers, and maybe Uncle Harry. As you now know from the examples above, this oftentimes leads to problems down the road.

It is your right not to hire the services of real estate professionals. But think very carefully before doing so. The industry exists for many reasons, but above all, lots can go wrong when selling expensive property!

The Value of a Second Opinion in Avoiding Real Estate Scams

When in doubt, ask for advice from others. One great option is to ask a real estate agent in another area, one who has no skin in the game, what their opinion on a specific situation is. For example, if you are buying a home in Dallas and selling yours in Austin, your agent from Dallas may be able to advise you if you think something questionable is going on with your Austin deal.

Never be afraid of hurting someone’s feelings in a real estate transaction. I have seen clients give money to buyers and sellers because they trust that the other party will do the right thing. More often than not, that is a poor decision.

Unless someone is contractually obligated to work with you, assume they are not. Never make it easy for someone to play games with you.

Summary of Real Estate Scams

By now you have learned a little bit about the various real estate scams that exist in residential real estate. Remember though, there are countless scams out there, and people come up with new schemes every day.

When in doubt, get another opinion from a trusted professional. Above all, never assume that someone is looking out for your best interests. They rarely are.

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