So no sooner to I get taught about fraud then do I hear about a case locally.

A few months ago, I was speaking with a lender representative and he was contrasting working in the BIG city (Toronto). He said the majority (80%) of the deals they receive are fraudulent. We were stunned. We naturally asked what our city was like. Oh, there’s a couple…a year.

It’s out there and depending on where you live determines how common it is.

I didn’t think much about it until I was speaking with a real estate agent friend of mine. He was talking about a deal that he worked on with a client. The client wanted to structure the offer in a very detailed and complex way. He got the client to explain it to him several times as he truly didn’t understand the need for all the complexity. He wrote up the offer for the client, but presented to the broker owner. Fortunately he had the sense to do this. The broker read it quickly and asked him if he understood that this was a fraudulent offer. He explained that all the complexity boils down to giving control of the property for a period of one year, after that time the ownership (and associated debt) would then return back to the original owner.

Not surprisingly the client was unreachable later.

Given my experience in the past with bad real estate deals, as soon as someone starts to make things complex or simply start feeding you all kinds of information (most of which is irrelevant), this should raise a red flag or alarm bells should start ringing in your head. Another clue is they never directly answer your questions.
Some wise person once asked, “B.S. beats brains?”. If the deal seems to good to be true, start checking facts. Start by asking someone who has done something similar before. Wade through the “B.S.” as it were. If there is a problem with the deal, you’ll likely find it fairly quickly. Don’t worry about the pressure of “losing out” as it is a “limited time offer”. If it’s a real deal, and you miss it. Don’t worry, there will be another one next week. A  deal of a lifetime comes around about once a week, if you are looking for it and have done your homework.

If you’re really on your toes, tell them you will agree to a conditional offer. Say something logical like conditional on inspection or appraisal. If they balk for any reason, walk.  If they insist, tell them to fax it to your lawyer, that usually stops them cold.

This week was an interesting treat. We had a fraud investigator speak to a group of mortgage brokers.

The beginning of the presentation started with a few of the more notable fraud cases that have made the news in Canada. The most memorable one was the operation setup in Alberta where we had an agent, appraiser & a lawyer involved in over 150 transactions for $1.5M. Old houses that were slated for demolition, who could it hurt?
The most popular place for mortgage fraud? Toronto. Possibly because of all of the major players own a skyscraper with their name & logo on it. This is followed by Calgary, Edmonton & Vancouver. I guess the folks down East have better things to do with their time.

Through out the seminar, they kept telling us, we’re not here to teach you how to do fraud but instead the things to look for to identify fraud. I found this amusing, as they basically told you everything to look for (and avoid doing?) to ID a fraudulent application and by the same token how to do it better yourself.

Ok, so they left out a few important details, but it sure got the mind spinning. What if someone did…?

Some of the interesting things folks have done. Set up a call center. Each phone has a script beside it and a couple people run around and answer the phone and read the script beside that phone. “Yes, so & so works for this company.” One tip off for the investigator was one address had over 50 different law firms… all on the same floor. The floor wasn’t that big.

The way they get around the call center, ask a question the person should be able to answer, but is not covered by the script (does your bakery do weddings and bar mitzvahs?).

The had some actual samples of letters of employment. Some one didn’t bother getting the complete logo on the letterhead, and they forgot to do the math ($17.50/week x 40 hrs does not give you $45,000/year). Then there’s my personal favourite, spelling mistakes. All the numbers were left justified.
Paystubs with every number rounded to the nearest dollar. Then there was the T4 slip that someone used and then someone typed over it. 2001 with 2002 over top.

Oh, no one ever actually checks all these documents do they?

How about an investment statement with text running off the page. No website. Numbers that don’t add up. All statements refer to “since your account was opened”. Account number of 123456. No contact name, just a phone number.

Next up was the MLS listing. This is the worst I’ve seen. 3×3 rooms.61 Sq Ft total. MLS number 99999. Contact number 555-1212. Seller “Niceguy”. Agent Peter Sales. “undeveloped basement”, classic.

Then there’s the purchase & sale agreement. Another complete mess. All phone numbers starting with 555 just for starters. Bigg Law is the lawyer representing both sides.

Some of the interesting things I learned. Something called a straw borrower. Some poor guy willing to let someone else use his identity for a few hundred dollars in order to qualify for a mortgage that he/she never plans to pay.

One of the early signs that it might be fraud, early delinquency. This is one of those times where I have to say no Sherlock. You suspect it might be fraud when they don’t pay the first payment. REALLY? Wait let me guess, the next sign would be you try and contact the individual and you can’t? I don’t know this just struck me as an odd thing to say “early delinquency”.

Statistics also proved interesting. In the US, they are required by law to track fraud, not in Canada. In the US the number is rising rapidly from several hundred million in the late 90′s to an estimated $500 Billion this year. Yes, that’s right Billion with a “B” or half a trillion. Conversely, the amount or instances of reported mortgage fraud had steadily declined over the same time. I guess the smarter ones who got away with it are getting better and more efficient and doing larger and larger deals.

Makes you wonder if organized crime might be behind some or most of these mortgage fraud cases.

Who’s involved in mortgage fraud? The list was extensive and inclusive. Starting with lenders, accountants, lawyers, mortgage brokers, appraisers, real estate agents… basically anyone who might be involved in any aspect of the purchase of a piece of property.

The solution? For now, everyone has to do their due diligence. If a fraud case comes up and you’re involved in any part of the transaction, you are out of luck my friend. Probably the quickest way to end your career, unless you are the one to figure it out and report it.

Well, that was the fun for this week.

Until next time.

I’m going to go back to my roots or beliefs this time.

As much as I hope to educate people on how to fix their credit rating, every now and again I come across someone who isn’t quite clear on the whole concept of leverage.

One recent conversation comes to mind. Someone was looking to get a mortgage for 1 year. They only wanted one year as their parents were going to pay for the entire mortgage after 1 year. The person who referred them to me said it must be nice to have rich parents who would buy you a house.

This got me to thinking. Is it really a good thing to do this? Aren’t the parents just setting themselves up for their kids to fail? When ever they run into money problems, they just go see mom & dad to get the problem fixed.

Ok, so there is the odd time when folks are mature enough to handle this and take responsibility and save their own money for their kids, but I have to think that’s fairly rare.

My real point here is, just imagine for a minute taking that money and putting 10% down on 7 or 8 investment properties.  Have the tenants pay for most of the mortgages and as they get paid off one at a time being financially free after say 15-20 years.

Now that’s leverage. You use 10% of your own resources and use the banks resources to fund the remaining 90%. Yes, you pay interest. Yes, you are locked in to a long commitment, but look at the rewards in the end. You can choose to do what you want. You have a large source of passive income each month.

Compare this with owning 1 house (where you live) and saving your money. In 15 years, you’ve managed to save a full mortgage payment each month. Your not paying interest on a mortgage so after 15 years, you’ve got close to $300,000 in the bank.

Ok, now let’s say 7 single family homes, the majority of which are paid down via accelerated payments or using the debt snowball effect (pay off one then work on the next mortgage). Say you still owe $100K on 2 or 3 mortgages. Now the value of the properties has risen by an average of 6% per year, but we wont even include that. Just look at the strait value of the houses themselves. 7 properties at $250K that’s a total of $1.75M minus your outstanding mortgages.

Add to that that you still rent out these properties and still earn a passive income from them. Huge asset base + monthly income verses saving on your own $300K.

Let the power of leverage work for you. Let money work for you, not the other way around.