Should You Worry About Fraud When Buying a Home?

Various forms of real estate fraud are on the rise, the news tells us. The biggest one making headlines is “collusion,” which we’re told affected fewer than 5% of real estate transactions before 2009, but doubled by 2010, and then fell only a little, to 6.8%, in 2011. (See “Housing prices: Agents make houses sell for a lot less. On purpose,” by Schuyler Velasco of the Christian Science Monitor.)

Also called “flopping,” this  form of fraud is not likely to affect you as a homebuyer — it simply means that home sellers convince the bank to let them sell the house “short” (for less than what’s owed on the mortgage), sometimes by tearing up the lawn, painting false cracks, and otherwise making it look bad; then they sell it to a friend or family member; then happily roll in profits when that person makes big bucks reselling the place a day or two later. The bank/lender is the primary victim of this crime.

Then there are the various schemes and scams that prey on homeowners having difficulty paying their mortgages; see, for example, the video “ConsumerWatch: Real Estate Fraud On The Rise In Bay Area.”

But when it comes to simply buying a home, the type of fraud you should probably worry about the most concerns the seller’s representations about the house’s condition. In most U.S. states, sellers are required to fill out a disclosure statement, itemizing the house’s features and pointing out any known defects. (Even in those states that don’t legally require it, savvy buyers can negotiate to receive such a summary.) Unfortunately, the disclosure forms don’t require the seller to actually investigate the property, and they often contain opportunities to fudge an answer (such as the option to check a box saying “unknown”), leading some sellers to turn a blind eye to problems.

That’s why any home buyer with an ounce of sense will also make the sale contingent upon the right to hire one or more home inspectors, and to be satisfied with the results of the inspectors’ reports. A trained home inspector will examine the house from roof to basement, test the various working systems, and point out defects concerning everything from wiring to leakage to foundation issues.

Those two protective mechanisms, the disclosure report and home inspection, are usually enough to uncover the biggest problems with a house.

And yet . . . some home sellers manage to perpetrate more serious forms of fraud, even under the nose of the home inspector. Attorney Ken Goldstein of Massachusetts, for example, says: ““One of the most blatant cases I’ve seen was where, a few weeks after the sale, the new owners heard a crash from the basement. The ceiling—one of those drop structures with a metal framework and tiles fitting in the grid—had just collapsed. The tiles were all soaking wet. Suspiciously, an old kitchen pot was sitting within the wreckage. It turns out there was a leaking pipe up there, and the sneaky seller had apparently removed a tile and put in the pot. That worked to hide the problem through the closing date—but then the pot overfilled.”

Oops. When something like that happens, it’s time to read Nolo’s article on “Home Defects: Sue the Seller?“.