There are variations on this type of fraud, but one typical scenario involves a flip to an accomplice at an inflated price. The arrangement involves a sale of property, possibly from a legitimate seller, with a subsequent (fraudulent) flip for a higher amount establishing a falsely high property value. That high value is then used as the basis for obtaining an inflated loan. For example, fraudster buyer negotiates the purchase of a property from a legitimate seller for market value of $500,000. Fraudster buyer then flips the property to accomplice fraudster (or in some cases a dupe) for $650,000, and the second (fraudulent) agreement is used as the basis to obtain a high ratio loan for $585,000 ($85,000 above market value). The fraudsters then disappear with the excess value, leaving the bank holding a property worth less than the mortgage.
Another variation involves a series of flips in a short period of time, each with a rising value on the property when no improvements or other criteria would account for the rapid increase.
The fraudsters are counting on the lender not to do a proper appraisal. Although lenders are responsible for their own decisions on when to lend money and for how much, you can assist in fighting fraud if you think a value fraud is being perpetrated.
Common Characteristics of a Value Fraud
These are common characteristics of a value fraud:
- The original contract allows for a nominee or an assignment, and a flip occurs (often for both deals to close on the same day).
- The lender only knows about the second contract with the higher value.
- No realtor is involved (especially in the flip), or if there is a purported realtor, real estate commissions are rebated to one of the parties.
- The lender has not done an appraisal or independent valuation.
- You are asked to act for the lender, the nominee buyer (fraudster or dupe) and the original (fraudster) buyer, but the lender does not know you are acting for the original (fraudster) buyer, as the lender does not even know about the original contract.
- Often you are asked to complete the transaction by preparing documents so the property transfers from the innocent seller to the nominee buyer at the lower price set out in the original contract.
- The high ratio mortgage amount (above the original contract price) is paid into your trust account, and you are asked to pay out the excess funds to the original (fraudster) buyer, the nominee buyer, or some other seemingly unconnected person.
- The nominee buyer may sign a power of attorney in favour of the original (fraudster) buyer so that the nominee need not even attend at your office.
- You may be paid higher than usual fees.
Tips on Fighting Value Fraud
Here are some tips on recognizing and fighting value fraud:
- Be cautious about flips. Many are legitimate, but in any situation where the seller on the contract is not the same as the registered owner, ask questions to find out the background of the transaction and assess its legitimacy.
- Insist on the documentation and evidence you need to be satisfied of the legitimacy of the transaction. Such evidence may include searches from Information Services Corporation if you suspect a large number of background transactions have occurred, such as a rapid turnover of mortgage financings with the amounts rising in each case. If you suspect that the flips have been happening on separate occasions using different lawyers each time, consider doing historical searches to see if there have been repeated sales at progressively higher prices over a short period of time.
- Verify your clients’ identities in accordance with Part 15, Division O of Law Society Rules.
- In any situation where you are being asked to represent both a buyer and a lender, follow the provisions of Code respecting conflicts of interest (s. 3.4-1) and joint retainers (s. 3.4-5 to 3.4-9).