Even the savviest real estate investors can fall victim to various real estate scams. Con artists try to scam investors because the real estate market is so fast-paced. Many investors are more concerned with operating quickly and efficiently than they are with testing the veracity of a prospective investment.
If you’re planning your next real estate investment, it’s only natural to be concerned about potential financial risks you may face. While any investment is risky, it’s becoming increasingly complicated for many real estate professionals who worry about falling victim to a scam or believing an inaccurate claim about a prospective investment property.
Scam protection starts with education
It’s all too common to come across claims about prospective investment properties that may not be fully accurate. Property owners may deliberately mislabel the size of their asset, the number of bedrooms or units it has or even the size of the lot. Others may unintentionally misrepresent the property. Often, the veracity of a real estate listing comes down to semantics, and the different ways people might interpret or misinterpret industry terms.
To protect yourself against possible scams, be aware of the ways hucksters are currently trying to dupe real estate investing professionals. Additionally, you need to possess thorough knowledge regarding the way homes are appraised, so you can accurately dissect claims about properties you’re thinking about investing in.
Learning how to navigate real estate appraisals will help you make sound investments, instead of falling prey to dubious claims and well-laid traps.
Common real estate scams
There are no shortages of common scams targeting real estate professionals. If a deal or investment opportunity seems too good to be true, it’s likely a good idea to investigate it carefully. While the opportunity may be legitimate, there’s a strong likelihood there’s something in the deal you’re overlooking.
- Bait and switch sales: If you’re hoping to sell off an investment property shortly, this is a scam to beware of. During a bait and switch sale, a prospective buyer will offer a purchase price much higher than the market value for your property. Once you enter into a contract to sell them the property, however, the buyer will attempt to reduce the sale price. This leads to protracted negotiations and lost revenue, as well as missed opportunities from other serious buyers.
- Duplicated listings: When shopping for a new investment property, beware of properties appearing listed multiple times. Many unscrupulous scam artists will copy legitimate real estate listings from brokerages and list them on their own to drive phone calls and traffic. If you call about a fake listing, you may end up being roped into paying fees or wiring money to the hucksters. Be sure to talk to the police if you encounter any duplicate real estate listings or suspicious behaviour behind them.
- Fake real estate lawyers: An increasingly common type of scam is impersonating a real estate lawyer. If a savvy scam artist impersonates a real estate lawyer, they may be able to direct closing costs or other funds to their accounts during the time of the transaction. Be sure to hire a real estate attorney you can trust and ask to see their credentials. You may want to call your local bar association if you’re suspicious of someone representing themselves as a real estate attorney.
- Unlicensed realtor scams: Just like fake real estate lawyers, unlicensed realtors are becoming increasingly common. Unlicensed realtors will commonly represent a property for sale. But, as soon as you cut a check for escrow, the realtor deposits the check into their account and disappears. Even if someone had a real estate license at one point, this doesn’t mean they’re still licensed and backed by a local association of real estate professionals. Always check credentials!
When a scam isn’t a scam
Sometimes there is no scam—just a white lie posing as a grey area. Let’s take a look at one of the most common and confusing for new investors.
Property is listed as a three-bedroom home. But, when you get inside and have a look around, there’s just two bedrooms and a den. The listing agent and even your realtor confirm the listing as a three-bedroom. What gives?
As it turns out, this is a legitimate listing—one you’re likely to encounter in time. It’s also an opportunity for a lesson in the importance of an appraisal. To ensure you know exactly what you’re buying, always conduct a thorough and accurate appraisal of the property you’re considering.
In some cases, that means buying a three-bedroom home with two bedrooms. Fortunately, it might mean buying it for well under the advertised price.
A look at the appraisal process
Real estate appraisers are independent professionals who carefully and accurately assess the value of a piece of property. There are many factors appraisers consider when determining the fair market value of a certain real estate asset.
Real estate appraisers in Canada are licensed by one of two bodies: The Canadian National Association of Real Estate Appraisers, or the Appraisal Institute of Canada. You can rely on both of these organizations to provide you with listings of the best real estate appraisers in your area.
Because real estate appraisal professionals operate off of a set of agreed-upon industry standards, they can help you clear up any confusion that may be surrounding your prospective investment. For instance, if you’re concerned about whether or not the “den,” in the property you’re considering could be sold to renters as a “bedroom,” your appraiser can help you clear that up. Additionally, appraisers help ensure you’re not overpaying for a home that may have serious structural challenges you can’t identify on your own.
Always seek appraisal
Most lenders will require you to invest in a real estate appraisal before they’ll approve financing for your investment purchase. You could even talk to your lender to ask their recommendation for appraisers operating in your area. Different appraisers specialize in different types of real estate. Select an appraiser with qualifications to appraise in your target investment class.
While real estate scams and bad actors in the real estate industry are relatively rare, it’s important you know the warning signs of a sour deal. Learning how to carefully analyze and consider every real estate opportunity—while still moving at a pace fast enough to take advantage of rare opportunities—helps you to set yourself apart from other real estate investors.