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Red Flags for Fraud in Real Estate Transactions

The following is a list of some possible indicators of fraud in residential real estate transactions. The presence of one or more of these indicators in a transaction does not necessarily mean that a fraud is occurring or has occurred in the transaction, but they may merit investigation, depending on the circumstances.

This list is not intended to replace the lawyer’s professional judgment, and it is not exhaustive. Whether a fraud is being committed in the course of a real estate transaction will depend upon the circumstances of the individual matter or transaction.

Note: Many of these indicators are also present in transactions involving security or property other than real estate, such as business loans.

Recent property purchase

  • The client has recently purchased a property on an all-cash basis and is now placing a mortgage on the property.
  • The client has a copy of the client’s Transfer/Deed but does not have any other documents relating to the property (such as purchase closing documents, a lawyer’s report, a title insurance policy, or a survey).
  • The client does not retain the same lawyer who acted in the purchase transaction to act in the subsequent mortgage transaction. The client may also instruct the new lawyer not to contact the former lawyer.
  • The search of title discloses two, three, or more recent transfers of the property at ever higher prices, and possibly the same lawyer acted on each of the transfers.
  • The title indicates a pattern of mortgages being registered and discharged shortly afterwards.

The agreement of purchase and sale and the property

  • The agreement of purchase and sale contains no hand-written amendments.
  • The agreement of purchase and sale contains an amendment that provides for a reduction in the purchase price or a payment to the vendor after closing. The intention here is that the mortgagee sees only the unamended agreement, not the later amendment, as a result of which the mortgagee may overvalue the property
  • The vendor acknowledges receipt of deposit moneys that are not required pursuant to the agreement of purchase and sale.
  • The deposit is paid to the vendor directly rather than to the vendor’s lawyer in trust or to the real estate agent.
  • There is no real estate broker involved in the transaction.
  • A real estate broker is listed in the agreement, but the lawyer does not receive any communication from the broker (for example, there may be no commission invoice).
  • The property is vacant or tenanted. Fraud involving vacant land is easier to carry out because there is no building that a lender may want to inspect. Fully tenanted properties such as a small apartment building often only require inspection of the common areas, and the owner may not be aware of what is happening.
  • The property is vacant land that has no mortgage registered on title. The lack of an existing mortgage makes fraud especially easy because the fraud may require little more than forged identification documents.

The transaction(s)

  • The client vendor is or purports to be a trustee or is signing for the registered owner with a power of attorney.
  • The vendor does not have fire insurance on the home.
  • Utility companies are unaware of the vendor owning the home.
  • The client needs to close the transaction very quickly and may apply pressure to that effect.
  • The client is a new client and promises to refer more transactions to the lawyer.
  • The client arranges a mortgage through a broker, and the brokerage fee is unusually high.
  • The client is prepared to pay higher legal fees than normal for the lawyer’s services.
  • The purchase price is much higher than the purchase price of recent transfers of the same property.
  • There are large and unusual adjustments in the statement of adjustments (such as large credits for renovations).
  • The statement of adjustments does not reflect the terms of the agreement of purchase and sale and any amendment thereto.
  • All or most of the funds required to close the transaction come from the institutional lender and little or none from the purchaser.
  • The name of the client in the identification produced by the client does not match the name of the client in other documents in the transaction or is otherwise not as expected.
  • The closing is scheduled during the month-end closing rush and/or just before a long weekend (assumes the presence of other red flags).

Mortgage proceeds

  • There is a surplus of mortgage proceeds after the closing of a mortgage transaction that is to be paid to the borrower or to a third party (assumes the presence of other red flags).
  • On a refinancing, the borrower brings to the lawyer the mortgage discharge statement for the loan being refinanced. Only a statement from an existing private mortgagee’s solicitor and registration of the discharge of the private mortgage at the closing, or a statement received directly from the existing institutional mortgagee, should be accepted.
  • The client directs part of the mortgage proceeds to third parties (especially parties such as offshore recipients or a currency exchange).
  • The client instructs the lawyer that it is unnecessary to prepare written directions authorizing the payment of funds to third parties. The best practice is always to obtain the client’s written authorization for all trust disbursements.
  • The mortgage is a cash-back mortgage (a product offered by some institutional lenders), and the cash back is the full amount of the equity in the property.
  • The client directs the lawyer to rebate a portion of the mortgage surplus to the vendor.

Client is a facilitator

  • A new client (facilitator) refers a number of real estate files to the lawyer, and the client, although not a party to the transaction, controls the transaction (e.g., gives instructions to the lawyer, arranges for the parties to the transaction to sign documents, etc.) and directs the parties in the transaction.
  • The client was not referred by anyone the lawyer knows.
  • The client does not have a personal cheque for the client’s pre-authorized debit plan but provides a blank “counter cheque.”
  • The lawyer is instructed to pay the excess mortgage proceeds to the facilitator even though the facilitator does not appear to have an interest in the transaction.

Flip transaction

  • The vendor acquires the property the same day that it is being sold for a higher purchase price (flip transaction).
  • The lawyer is asked to act for both the purchaser and the vendor in the flip transaction.
  • A bank lends money on the strength of the consideration contained in the flip agreement.
  • The client instructs the lawyer not to disclose to the lender that the transaction is a flip or that the lender is lending money on the higher consideration.
  • In a paper-based (non-electronic) transaction, the land transfer tax affidavit shows the higher consideration. The Transfer/Deed of Land signed by the original vendor containing a lower consideration is manually altered prior to closing to match the consideration set out in the land transfer tax affidavit.

Multiple transactions

  • A new client begins referring a number of real estate files to the lawyer, and the same parties (purchasers and vendors) are involved over and over in transactions.
  • The client indicates that the client is in the business of renovating homes.
  • The same real estate agency appears regularly on the agreements of purchase and sale.
  • The mortgages arranged in these transactions are usually high-ratio mortgages with mortgage insurance.
  • The lawyer is instructed to use the excess mortgage proceeds for the purchase of another property.

Corporations

  • The original minute books for the company are not available or incomplete.
  • The minute books contain irregularities such as the lack of the “pink-stamped” articles of incorporation. (Note that pink-stamped articles are becoming less common since corporations may now be incorporated through Internet service providers using electronic procedures that create articles of incorporation without being stamped at a government office.)
  • The corporation may have a recent filing with the Ontario government under the Corporations Information Act, or other government having jurisdiction, in which the names of the officers and directors and perhaps the corporation’s address have been changed to those of the fraudster. These filings can also easily be done electronically and without proper identification.

Employees

  • A new (or existing) employee begins referring real estate transactions to the office and involves himself or herself in the files.
  • A real estate assistant offers to handle all aspects of a transaction or of the lawyer’s real estate practice himself or herself to “save the lawyer time.”
  • Friends, relatives, or business associates of an employee bring real estate transactions to the firm.

Powers of attorney

  • Forged powers of attorney may be used by a fraudster claiming to represent the owner of a property.
  • Similarly, a titled spouse may try to sell a matrimonial home using a forged power of attorney from the non-titled spouse to sign the consent of the non-titled spouse. In such a situation, the spouses may in reality be separated, or the non-titled spouse may simply not know what is happening or may be mentally incapable.
  • The donor of the power of attorney may be out of the country or otherwise unavailable so that the donor’s identity and signature cannot be verified.
  • The power of attorney may not have been witnessed by two independent witnesses as required under s. 10 of the Substitute Decisions Act, 1992, or your attempts to contact the witnesses may be unsuccessful.
  • The power of attorney was not prepared by a lawyer and/or was not signed and witnessed at a lawyer’s office.
  • The power of attorney contains one or more conditions that may not have been complied with.

Fraudulent conveyance

  • A debtor, perhaps insolvent or soon to be insolvent, may retain the lawyer to transfer the title of the debtor’s home or other assets to another person or to a corporation controlled by another person in violation of s. 2 of the Fraudulent Conveyances Act.
 
Last updated: December 2, 2020
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