Real Estate Fraud

Updated

Real estate fraud is where one person or party commits fraud in connection with the purchase, sale, rental or financing of real estate property. Real estate fraud is a crime under state and federal laws and can result in jail or prison sentences.

A party can commit this fraud at several different stages of a given real estate transaction. Some of these may include at the appraisal, closing, and foreclosure proceedings.

States have adopted many different laws and legal theories to prosecute offenders of this crime. These include:

Note that some of the most common forms of real estate and mortgage fraud are:

In California, prosecutors often charge real estate/mortgage fraud offenses under:

  1. Penal Code 487 PC, which prohibits grand theft,
  2. Civil code 2945.4, which prohibits foreclosure fraud,
  3. Civil Code 890, which prohibits rent skimming, or
  4. Penal Code 115 PC, which prohibits filing forged documents.

Crimes under these laws can be charged as either misdemeanors or felonies.

Our California criminal defense attorneys will highlight the following in this article:

man handing keys to another
Real estate fraud is when one person or business takes advantage of another in a real estate transaction.

1. What is real estate fraud and mortgage fraud?

Real estate and mortgage fraud are when one person or business takes advantage of another in a real estate transaction. It can occur at several different stages of a transaction, including the:

  • appraisal,
  • closing,
  • foreclosure, and
  • others.

States use several different laws and legal theories to prosecute offenders of these crimes. These include:

  • theft by false pretenses,
  • foreclosure fraud,
  • rent skimming, and
  • forged deeds or documents.

1.1. Theft by false pretense

This is an offense where someone:

  1. defrauds another person out of money or property, and
  2. does so by way of false promises or representations.1

While state laws vary, a prosecutor has to prove the following to convict a person of this crime:

  1. an accused intentionally deceived a real estate owner or mortgage lender,
  2. this deception was done by making a false promise, and
  3. the “victim,” relying on this promise, gave the defendant his/her property or money.2

Example: Pamela has $50,000 of equity in her home and she falls behind on her mortgage payments. As a result, she now faces foreclosure. She hears a radio ad for a “foreclosure consulting” company run by Dexter and calls the business.

Dexter tells her that he can stop the foreclosure by negotiating with the bank (a false promise) - but only if she signs certain documents giving him the power to act on her behalf. Dexter provides her with the documents and Pamela signs. She didn't realize, though, that Dexter had her sign a deed transferring him title to her house.

Dexter now owns the equity to Pamela's home, and he acquired it by misleading her about the documents she was signing. Therefore, he has committed theft by false pretense (as well as foreclosure fraud).

1.2. Foreclosure fraud

This is a crime committed by professionals that “help” homeowners facing foreclosure.

A person is guilty of the offense if he/she either:

  1. charges the homeowner for a service prior to having provided it,
  2. charges or collects an excessive fee for services,
  3. takes any interest in the property subject to foreclosure,
  4. takes money from a third party for his/her services and does not tell the homeowner,
  5. takes a power of attorney from the homeowner, or
  6. defrauds the homeowner into signing an illegal contract.3

Example: Please return to the example above involving Pamela and Dexter. Dexter committed foreclosure fraud because he took an interest in Pamela's home in connection with his foreclosure prevention services.

Note that Dexter would also be guilty of this crime if he didn't take an interest in the property but charged Pamela an excessive fee.

1.3. Rent skimming

A person commits rent skimming in one of two ways. The first is by a defendant:

  • renting residential property during the first year it is acquired, and
  • failing to apply the proceeds to the mortgage.4

The second way is by an accused:

  • pretending to own property (that he/she does not own),
  • fraudulently renting the property out with no right to do so, and
  • keeping the rent proceeds.5

Most states say that rent skimming is only a crime if it is done more than once. A one-time act, though, subjects the “skimmer” to a civil lawsuit.

1.4. Forged deeds or documents

Real estate and mortgage fraud cases often get charged under state laws re: forged documents.

These laws say that it is a crime for a person to:

  1. knowingly file, register or record a false or forged document, and
  2. do so with a government office in the state (e.g., a county clerk's office).6
foreclosure sign - foreclosure fraud is a common form of real estate fraud
Foreclosure fraud is one common form of real estate and mortgage fraud.

2. What are some common forms of real estate fraud?

Some of the most common forms of real estate and mortgage fraud are:

  • foreclosure fraud,
  • straw buyer schemes,
  • illegal property flipping, and
  • predatory lending.

2.1. Foreclosure fraud

Foreclosure fraud is defined above in section 1.2. There are several examples of this type of fraud, including:

  • title transfer schemes,
  • bait and switch, and
  • phantom help scams.

2.1.1. Title transfer

Title transfer takes place when:

  1. a homeowner is facing foreclosure, and
  2. a “consultant” persuades him/her to sign over the title to the home.

In these situations, the consultant tells the homeowner that:

  • he/she can remain in the home by renting it, and
  • he/she will be able to repurchase it in the future.

The consultant, though, eventually evicts the renter and acquires any existing equity in the home.

2.1.2. Bait and switch

This is a title transfer where the homeowner is unaware that he/she is transferring title.

Victims are led to believe they are signing documents that will help secure a new loan. In reality, though, they sign documents that transfer title to their home to the “consultant.”

2.1.3. Phantom help scams

A phantom help scam is when:

  1. a foreclosure assistance company promises to help a homeowner avoid foreclosure,
  2. it does so in exchange for an upfront fee, and
  3. it accepts the money but performs zero service.

By the time the owner is aware of the scam, it is often too late to avoid the foreclosure.

2.2. Straw buyer schemes

A straw buyer is a person who purchases a home on behalf of another person.

The straw buyer is used because the real buyer cannot complete the transaction for some reason. For example, the real buyer may have bad credit.

The act of using a straw purchaser is considered illegal where:

  • the transaction defrauds someone, or
  • it is unlawful for the real buyer to make the purchase.

2.3. Illegal property flipping

Illegal flipping is when:

  1. the value of a piece of property is wrongfully inflated because of a fraudulent appraisal, and
  2. an unsuspecting buyer purchases the property at the inflated price, or
  3. a bank lends money on the property for more than its actual value.

Note that this scenario does not involve a person that:

  • buys a property,
  • fixes it up, and
  • then re-sells it at a higher price.

This is considered legal flipping.

2.4. Predatory lending

Predator lending is when a mortgage broker:

  • creates a loan for a potential buyer, and
  • loads the loan full of unnecessary fees that are of no benefit to the borrower.

A broker tries to get away with these loans to pad his/her commissions.

capitol building dome
Prosecutors have four main statutes to use to charge people with real estate fraud.

3. What is the law in California?

There are four main statutes in California that prosecutors use to charge people with real estate fraud. These are:

  1. Penal Code 487, which prohibits grand theft,
  2. Civil code 2945.4, which prohibits foreclosure fraud,
  3. Civil Code 890, which prohibits rent skimming, and
  4. Penal Code 115, which prohibits filing forged documents.

3.1. Grand theft – Penal Code 487

This code section is used to charge offenders of theft by false pretense (as defined in 1.1 above). The section:

  • includes property offenses7, and
  • does so when those offenses defraud someone out of property worth more than $950.8

A crime under this law is a wobbler offense.9 This means a prosecutor can charge it as either:

  • a misdemeanor, or
  • a felony.

Misdemeanor grand theft is punishable by custody in county jail (as opposed to state prison) for up to one year.

Felony grand theft is punishable by a maximum jail sentence of three years.

3.2. Foreclosure fraud – Civil Code 2945.4

Civil code 2945.4 is the California law that prohibits foreclosure fraud (as defined in 1.2 above).

A crime under this statute is also a wobbler. The potential penalties are the same as those for grand theft.

3.3. Rent skimming – Civil Code 890

Civil Code 890 is the California statute that prohibits rent skimming (as defined in 1.3 above).

The law makes it an offense for a person to commit multiple acts of rent skimming. A one-time act does not lead to criminal charges. Rather, the skimmer can face civil penalties.

Violations of Civil Code 890 are wobblers in California. The penalties are the same as for grand theft and foreclosure fraud.

3.4. Filing forged documents – Penal Code 115

PC 115 is the California law that prohibits filing forged real estate documents (as discussed in 1.4 above).10

Filing a forged deed is always a felony in the State.11 The crime is punishable by:

  • custody in county jail for up to three years, and
  • a fine of up to $10,000.12

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For additional guidance or to discuss your case with a criminal defense attorney, we invite you to contact us at Shouse Law Group.

For similar offenses in Nevada and Colorado, please see our articles on:

Legal References:

  1. Black's Law Dictionary, sixth edition.

  2. See, e.g., California Criminal Jury Instructions (“CALCRIM”) 1804 – Theft by False Pretense.

  3. See, e.g., California Civil Code 2945.4.

  4. See, e.g., California Civil Code 890.

  5. See same.

  6. See, e.g., California Penal Code 115.5 PC.

  7. People v. Ortega (1998), 19 Cal. 4th 686.

  8. California Penal Code 487a PC.

  9. Garcia-Lopez v. Ashcroft (2003) 334 F.3d 840.

  10. See, e.g., People v. Denman (2013) 218 Cal. App. 4th 800; and, People v. Astorga-Lider (2019), 247 Cal. Rptr. 3d 544.

  11. California Penal Code 115a PC.

  12. California Penal Code 1170h PC.

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