December 7, 2022
A transaction to buy commercial real estate (CRE) usually involves several individuals: the investor or Real Estate Investment Trust (REIT) representative, a CRE broker, a lender or financial backer, and the owner of the property for sale.
While the majority of commercial real estate transactions are concluded to everyone’s satisfaction, a few may involve attempts at criminal activities. Many are similar to thefts and scams that have been observed by residential real estate agents and their clients.
Common types of fraud include:
If you’re considering buying commercial real estate or will be involved in a transaction soon, you’ll learn the basics and know how to spot a possible theft before it happens.
We’ll look at each of these in detail.
Criminals who are familiar with commercial real estate transactions, or are directly involved, may attempt one of the following:
This is a catch-all term that may apply to a variety of schemes, but the definition is the same: the illegal use of another person’s or institution’s money.
Usually, the criminal was given lawful access to funds and limit themselves to stealing a portion of the money. This may also be described as embezzlement.
Some examples of misappropriation of funds:
Another form of theft — advance fee scheme — is more complex, but the perpetrators often steal from more than one investor and may be harder to identify.
Criminals who specialise in advance fee schemes target people who are shopping for a loan. Their scam is based on fake bank documents that appear legitimate, so investors and brokers should know how to recognize the fakes.
Here are the basics of a typical advance fee crime:
It’s easy to prepare and print fake financial documents since bank logos, and even font styles can be copied from the Internet.
If you’re ever presented with a loan offer document that doesn’t pass your sniff test, contact the Federal Trade Commission.
Another type of fraud that is more common among residential loans — wire fraud — is creeping into commercial real estate transactions.
This type of theft is committed by skilled hackers who are familiar with the details of real estate transactions. Large sums of money can be stolen with little chance of recovery.
Potential transactions have had to be canceled because of the losses incurred by the buyer.
There’s one last thing to consider: The risks involved if a buyer presents a large amount of cash during the transaction. Here’s why this is not recommended.
A final note: While a buyer or investor may have a legitimate reason for producing a large amount of cash during a transaction, this may result in the filing of a Suspicious Activity Report (SAR) being filed by a lender.
A SAR is required for several types of transactions, including cash transactions exceeding $10,000. This is because large cash transactions may be attempts at money laundering.
Ideally, an investor planning to buy commercial real estate will work with a CRE broker who is licensed and recommended by experienced investors.
Other ways to keep every transaction safe: Be sure your computer system has a firewall and reputable anti-hacking software installed.
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