How to Safely Buy Commercial Real Estate

Last Updated: 

December 13, 2022

How to Safely Buy Commercial Real Estate and Avoid Fraud
Want to Close Bigger Deals?

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:

  • Misappropriation of funds;
  • Advance fee schemes; and
  • Funds wired to cyber-criminals.

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.

Common Types of Commercial Real Estate Theft

Criminals who are familiar with commercial real estate transactions, or are directly involved, may attempt one of the following:

#1 – Misappropriation of Funds

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:

  • A commercial real estate agent holds funds in escrow but withdraws a portion to cover a personal debt.
  • A buyer is approved for a loan to buy a commercial property but keeps some of the loan funds to use for another purchase.

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.

#2 – Advance Fee Schemes

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:

  • The promotor will print a fraudulent letter of credit or similar document and share it with a potential victim.
  • The promoter will promise to provide funding in exchange for a deposit of part of the loan’s amount. This deposit is an “advance fee.”
  • The promoter pockets the advance fee and disappears.
  • These fraudsters may also produce fake letters that tell victims that their funds are “blocked” or protected and will arrive shortly.

It’s easy to prepare and print fake financial documents since bank logos, and even font styles can be copied from the Internet.

Advance Fee Schemes
Advance fee fraudsters may appear to be professionals, which makes them potentially difficult to identify.

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.

#3 – Wire Fraud

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.

  • The hackers break into computers that belong to real estate agents and title companies, read their emails, and make notes of loans that will be finalised soon.
  • Next, the hacker will contact the buyer by email, fax, or video call.
  • The hacker tells the buyer that there has been a change in their closing, and their closing funds should go to a different bank.
  • The hacker provides new bank details, so the funds will be wired to their bank instead of the original destination.
  • Hackers often provide bank details that include a SWIFT number. This means the funds are headed to an overseas bank. 

Potential transactions have had to be canceled because of the losses incurred by the buyer.

Wire Fraud and Suspicious Activity Reports
A skilled hacker may invite a property buyer to a video call, substituting a still photo for live video while claiming a poor internet connection.

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.

#4 – Cash Transactions and Suspicious Activity Reports 

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.

More Tips for Staying Safe 

Ideally, an investor planning to buy commercial real estate will work with a CRE broker who is licensed and recommended by experienced investors. 

  • Keep a calculator handy for every stage of a purchase transaction.
  • Be sure to compare documents every time there’s a revision or the loan processes to the next stage.

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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