A home is the biggest purchase most people make in their lives, and a typical transaction involves hundreds of thousands of dollars. With so much money flying around, it's easy to lose track of a few thousand here and there, and there is no shortage of scams designed to scoop up your money. Somes schemes are more outrageous than others and may even involve stealing your identity and actual theft. Certain schemes trick unsuspecting homeowners into contracting for services they never actually receive or overcharging for these services; some target people looking for a deal on their mortgage, and some attempt to misappropriate funds.
You can avoid most scams by diligently reading and understanding every document involved in a home sale before you sign it. That's difficult to do, and even if you manage it, it's easy to miss "gotcha" clauses written in fine print. That's an important reason why you shouldn't conduct a real estate transaction without the help of a trusted financial/legal advisor. A real estate agent has a fiduciary duty to represent your interests and is the person on whom most buyers rely for guidance. In states in which allow the agent to represent both the buyer and the seller, however, the agent may have a conflict of interest. Even if that isn't the case, realtors are busy people and are no substitute for diligence on your part.
Scam possibilities are legion, and new ones are constantly being invented. Here are four common ones and how you can avoid them.
Bait and Switch
The setup: The new homeowner needs a loan and didn't start shopping for one until finding the property. A low credit rating limits the amount for which the buyer is qualified and/or the buyer's budget limits the maximum monthly payment. Within hours of signing the purchase agreement, the buyer begins receiving solicitations of unrealistically favorable credit offers.
The scam: A particular company offers the requested loan with a great interest rate and a low monthly payment. The buyer agrees and the sale proceeds into escrow, but just before closing, the lender modifies the terms. It's too late to back out, and the buyer agrees to the new, unfavorable terms. In a related tactic_the "bait and remember"—the lender "forgets" to add closing fees and other costs until just before closing.
The remedy: Get pre-qualified for a loan before you make an offer, and base the offer on what you can afford. Work only with licensed lenders and avoid unsolicited offers, no matter how attractive they sound. Never sign a document without going over it with your legal or financial advisor.
Fake Utility Bills
The setup: New homeowners often forget to discuss small details, such as utility payments, with the previous owners. They might not even know which companies supply electricity or other essential commodities, such as propane.
The scam: A "representative" from a utility company calls the new owner to advise of an amount owing by the previous owner. In a threatening tone, the representative tells the homeowner to send a check or pay by credit card. Otherwise, the electricity will be cut off or the needed amenity won't be provided.
The remedy: The first thing to remember is that utility companies seldom, if ever, conduct business over the phone. Even so, a skillful scammer can sound legitimate enough to compel action. Before doing anything, contact the utility company on your own or check with the previous owners or the selling agent.
The setup: New homeowners are eager to move in and adjust to their new life. Many are happy to pay a small monthly fee to insure against major appliance failure or structural defects they missed during the inspection. Home warranties, which typically last for a year, are designed to do just this.
The scam: While most new homeowner warranties are legitimate, they often require repairs to be made by specific companies. When problems do occur, however, the homeowner is at the mercy of the insurance company and the repair pros it authorizes. There may be little recourse against substandard repairs or repairs that take longer than they should. Moreover, the language in the warranty may not cover certain repairs, and there may be a large deductible.
The remedy: Consumer Reports recommends staying away from home warranties altogether. If you do decide to purchase one, check online reviews of the company before you commit. Read the contract carefully, and note the deductible.
Consumer Reports also advises against buying service warranties when you purchase new appliances. Instead, when buying a major appliance, use a credit card that provides warranty protection.
Mortgage Payment Administration
The setup: It is possible to pay off a mortgage faster by making bi-monthly payments. After closing, the homeowner receives a solicitation from a company that promises to administer the payments. Instead of sending the monthly payment to the mortgage company, you send it to the intermediary, and that company handles the payments.
The scam: The intermediary administrator doesn't provide its services for free. There is often a hefty processing fee and a smaller—but not insignificant—monthly fee involved. Some of these fees are unnecessary. In 2015, the Consumer Finance Protection Bureau sued one such company, claiming that it had charged $49 million in unnecessary fees.
The remedy: Making bi-monthly payments can shorten the term of your mortgage by several years, but you don't need an intermediary to do it. Set up automatic payments with your bank instead.
Scams Don't Just Affect New Homeowners
Any homeowner who has equity in the property or who is considering refinancing must also be on the alert for scams. A number of them, including bait and switch, are aimed at borrowers. Scammers create bogus schemes to repair bad credit and have even used false pretenses to convince distressed homeowners to "temporarily" transfer the title to their homes until they have the money to buy it back. When that day finally comes, the unfortunate buyer finds the buyback price inflated or the house already sold.
Some of the scams to watch out for include:
- Mortgage schemes that promise to significantly lower monthly payments by tacking the unpaid amount onto the principal.
- Loans that draw on existing equity that end up costing significantly more than the original loan. Equity-stripping schemes such as this can go so far as to require the owner to sign the property over to the lender and pay rent. In the end, the lender fails to convey the property back to the owner, as per the original agreement.
- Home improvement scams, in which a contractor agrees to do work for a particular sum and agrees to finance the amount. The contractor does substandard work, sells the financing package to a predatory lender and disappears. Such scenarios would happen less often if homeowners understood that home repair help is available for people with low incomes.
If you own a home or are considering buying one, your best safeguards against scammers are diligence and competent legal and financial advice.