A new homeowner’s dream turned into a nightmare when a six-figure sum needed to close the real estate transaction went to a scammer instead.
The district attorney in Wichita, KS, is still trying to unravel the scam, which saw a massive amount of money for a home closing end up in the wrong bank—not due to a mistake, but to fraud.
Scams like this are known as wire fraud. It’s a federal crime that involves the use of electronic communication, such as the internet or phone, to steal money.
The National Association of Realtors® explains real estate fraud is one of the most prevalent cybercrimes in the U.S.
Cybercriminals identify a pending sale transaction and then build a profile of the parties. This includes the title company, the real estate agency, and the buyer and seller.
NAR says the cybercriminals will hack into the email account of one or more parties and monitor email traffic. They’ll usually send false wire instructions that divert the deposits, closing costs, and even mortgage payoff funds from the intended lawful recipient.
The origin email is either the legitimate email of someone involved in the transaction whose account has been hacked, or a very similar email with usually one digit off (as what happened in the Kansas incident).
The buyer then unwittingly sends the money into the account of the criminal.
“This is not the first time we have seen this particular fact pattern,” District Attorney Marc Bennett told Realtor.com. “It is certainly not the first time that financial transactions have been impacted by way of a fabricated or altered email. I would say the uptick occurred several years back. Now electronic scams involving large sums of money are a regular occurrence.”
Real estate scams are on the rise
Real estate insiders say this sort of scam is not new. With real estate transactions typically requiring large cash bank transfers, homebuyers are perfect high-value targets for criminals—and the scam is on the rise.
“This type of fraud has become very common,” says Richard Redmond of Redmond Mortgage Capital. “Consumers have to be extremely careful before wiring money to escrow to close a real estate transaction.”
A recently released report by wire fraud protection firm CertifID, says that over 1 in 4 consumers are targets of fraud in a real estate transaction, and nearly 1 in 20 become victims.
Real estate wire fraud has grown 50 times in less than a decade, from $9 million to $446 million in annual losses reported to the FBI Internet Crime Complaint Center.
The growth is due to the complexity of real estate transactions (easier for people to get confused), the public availability of transactional data, and the big sums involved as home prices continue to balloon.
Fred Goncher of Backyard Mortgage Co. agrees that this type of crime is common. He tells how one of his clients came very close to losing a hefty sum.
“Two years ago, I had an attorney’s email get hacked and the hacker sent the borrower false instructions for a $300,000 wire,” he tells Realtor.com®. “When the problem was detected, the wire was canceled with about five minutes to spare.”
Experts say this kind of fraud is particularly devastating to the victim not only because of the large sums involved—often six figures or more—but because once the money is gone, it’s gone.
Wire fraud of this type is not covered by FDIC insurance as the bank simply followed the account holder’s instructions.
“If someone steals your credit card, you call and cancel it, and they don’t charge your card,” real estate fraud attorney David Fleck tells Realtor.com. “If someone hacks into your bank account, the bank will cover losses. But in this kind of fraud, you send the money to the bad guy’s account, likely overseas, and then it transfers to three other accounts, and you never see the money again.”
Your average buyer likely doesn’t have another six-figure sum lying around to cover the loss or make another home purchase.
Fleck says he has been seeing this scam for at least a decade, and those in the industry are well aware of it. However, an eager homebuyer might not be.
In fact, only 47% of consumers were informed about the risks by their real estate professionals at the start of the process, says the CertifID report. More than half of consumers were unaware that real estate wire fraud is “a thing.”
Fleck says that buyers might not be warned by those in the know for many reasons—perhaps real estate insiders simply don’t realize how prevalent the scam is—but that it would be “definitely helpful” if buyers are verbally warned early in the process.
First-time homebuyers are particularly vulnerable
According to the CertifID wire fraud report, first-time homeowners are three times more likely to become victims of this scam.
The first-time buyer is simply less aware of the dangers involved in such a high-sum transaction, and might believe that their hired real estate professionals will protect them.
More experienced buyers might have heard of real estate transaction fraud from friends or family, or professionals they worked with in the past.
Red flags to watch out for
Last-minute changes are a big red flag, say experts.
“Be cautious of last-minute changes to banking details,” warns Redmond. “An email with changes to previously sent wire instructions is a huge red flag.”
Another red flag is being asked to wire money to a bank not in the country where you are doing business. In fact, it is best if the bank is in the immediate area, less than 30 miles from the property in question.
Goncher says that for title money, the funds should always be going to an Interest on Lawyer Account or a trust account.
Fleck hopes that the law will catch up with this type of fraud.
“There could be legislative fixes for this,” he says.
How to stop this scam in its tracks
The good news? There is a simple solution to not becoming a victim of this type of fraud.
Pick up the phone.
“Always call and confirm the bank information and instructions with the person sending you the information,” says Fleck. “And do not use the phone number in the email. Use the number you already have for that person.”
Goncher agrees: “All wires must be verbally confirmed with the receiver before sending money. This is a simple phone call to a verifiable number.”
If you want to make certain you are sending your funds to the proper bank, grab coffee with your escrow agent or whomever you are doing business with, and verify the account details in person.
Read more at Realtor.com
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