Real Estate Investing Basics

The 10 Best Ways To Avoid Fraud In Real Estate

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Flipping Houses, Business Management, Personal Development, Mortgages & Creative Financing, Real Estate News & Commentary
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Recently a real estate attorney here in Memphis, TN pleaded guilty to stealing her client's money.

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She will now be spending the next twenty months in federal prison.

In short, she fooled some hard money lenders into thinking that they had made loans on real estate here in Memphis, when in reality the attorney had taken the money and purchased resort real estate for herself.

You can read the press release from the US Attorney’s office here for all the juicy details.

This attorney was a fairly prominent real estate attorney here in Memphis. She worked with a lot of investors and closed a lot of transactions.

A search of the Shelby County Tennessee Register of Deeds website, for example, brings up over 200 hits using just her name alone (hint: her middle initial is K). I even used her once many years ago.

Why write about this?

Because, I hope we can learn from it.

As real estate investors we need to understand and be reminded from time to time that we cannot abdicate our responsibility to know and understand what is happening in our business and where our money is going. If you ease up and let your guard down, you will eventually get burned.

So, what can you as a real estate investor do to avoid getting burned?

Here are some thoughts:

1. Do Your Homework

Know what you are getting into and do not buy into the hype.

Remember the numbers have to make sense!

If it seems too good to be true, than it probably is.

2. Keep Accurate Books

How can you know if you have been defrauded if you have no idea how much you are supposed to have or where it is supposed to be?

Even if you use an accountant or bookkeeper, keep up with what they are doing.

Related: Paperless Accounting: How to Streamline Your Real Estate Bookkeeping

3.  Check Your Accounts

Check all of your bank and credit accounts on a regular basis.

Look for odd and out of place transactions.

Immediately follow up on anything that seems suspicious or out of the ordinary.

4. Ask Around

We tend to think that licensed professionals are above the bar so to speak. Not so.

They are people, just like anyone else and they can be tempted!

Talk with other professionals and investors.

What do they have to say or better yet not say?

Sometimes silence can say a thousand words.

5. Go Outside the Circle

Try to get advice from professionals outside of a “circle” of connected players, say from a particular real estate agency.

Find and hire your own attorney, CPA, appraiser, etc.

A local REIA group might be a good source to find such people.

If you are doing business outside of your hometown, hire a local professional you know and trust to provide a separate review of your transaction.

6. Trust But Verify

Review all documents carefully.

Does the HUD-1 match what you were told?

Are there any odd charges?

Is the money going where it was supposed to?

Have your deeds been properly notarized and recorded?

Do you know how to find out?

Related: Good News! You Don’t Have to Trust Anyone in the REI Business.

7. Understand

Make sure you understand everything you are signing.

It is your money or your head on the line and if you want to spend three hours reading every document at a closing, then so be it.

Don’t feel intimidated and don’t be pushed around.

If you do not understand something then…

8. Ask Questions

Lots of them until you are satisfied.

Most definitely do not accept phrases like “take a breath” or “the computers were down” to your questions (see the press release to understand my meaning).

If you can’t get answers, go elsewhere.

9. Go With Your Gut

If something feels wrong, there could be a problem.

I mentioned previously that I had used this attorney once but I never did again.

Both my wife and I just got a bad feeling about things.

Nothing I can specifically point my finger at, but sometimes a feeling will be all you have.

10. Get Help

If you do get scammed, call the authorities and file a complaint.

Hopefully they will undertake and investigation and take action.

If not, live and learn.

You should only be taken advantage of once!

Ultimately it is up to us as investors to be on guard for fraud. Cavet emptor is still the rule of the day. Do not let greed or ambition blind you. The old adage holds true, if it sounds too good to be true than it probably is!

Lastly, if you become aware of questionable dealings, move on.

You are judged by the company you keep. Real estate investing communities are often tightly knit. You only have one reputation.

Keep it clean!

Have you ever experienced or know of real estate scams?

Please share in the comment section below!

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in ...
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    Replied over 6 years ago
    Great points. I find that going with what you know works best. If you are investing in a new area of RE, get a mentor or learn about it first. Do a few practice runs. Find out about what goes bad in those types of transactions. I recently turned down a syndicated deal, which on paper seemed great, and probably was, but it made me a bit nervous. So I went with a local property instead.
    Kevin Perk
    Replied over 6 years ago
    Eric, You make some very good points. I have a feeling people get talked into things they really do not understand. The big words like syndicate sound good. They see dollar signs. They don’t do their homework. They then get taken advantage of. You were wise to back away from something that made you nervous. Thanks for reading and sharing, Kevin
    Sharon Tzib
    Replied over 6 years ago
    I happen to love watching that MSNBC show, “American Greed,” and almost without exception it’s your advisors or someone in a very trusted position that ends up screwing the victims on those shows. If those people had taken even a 1/3 or your advice, they probably could have prevented what happened to them. Mostly they give over 100% control or don’t follow the “if it sounds too good to be true, it probably is” advice. Good stuff, Kevin!
    Kevin Perk
    Replied over 6 years ago
    Sharon, Interesting point. I think also if you appear organized and demonstrate that you know what is going on, you will act much like a security cage on an ac condenser. The adviser/crook can still get to you but will likely move on to an easier target. Thanks for reading and for the kind words, Kevin