More wire fraud diverting funds from real estate deals

In a world in which technology has taken the wheel and face-to-face communication a back seat, wire fraud has woven its way into real estate transactions.

“Wire fraud,” said Aniella Gonzalez, general counsel in Florida for Home Services of America, which includes Berkshire Hathaway HomeServices DWM Realty, “is frankly very prevalent in all transactions, all business transactions, any transaction in which you are working in online forums.”

As part of a real estate transaction, said Victor Petrescu, a partner at Levine Kellogg Lehman Schneider + Grossman LLP, a purchaser makes a large wire transfer to meet the purchase price of a seller when buying a property. On the other hand, potentially a mortgage company that “is lending money in conjunction with the purchase or sale may make a large wire transfer to a borrower of the mortgage proceeds in order to effectuate the closing of that transaction.”

Wire fraud, he said, involves situations in which someone “diverts wire funds that are meant to be sent to a seller of property or to a borrower of money in conjunction with the closing on a property, and that money is then diverted to another bank account or another person … and they’re not supposed to have those funds.”

Wire fraud can be seen in a variety of situations, Mr. Petrescu explained. “Sometimes it’s when someone impersonates a borrower in a transaction or a purchaser in a transaction where they’re not actually that person. It kind of happens in conjunction with identity theft.”

Wire fraud, he said, can occur in any circumstance in which someone is “interfering with a real estate transaction or closing in order to cause funds that should be sent to one party to be sent to another account.”

Wire fraud obviously delays the process, he said. If a purchaser pays $1 million for a home and the money goes to a bank account that a fraudster has established, and the fraudster immediately withdraws the money, this can cause a huge delay.

“The seller is out the purchase price,” he said, “and the parties collectively are going to have to figure out who foots the bill for the $1 million that were stolen. It could either be an insurance issue if the title agent who was conducting the closing didn’t take the proper necessary precautions and security measures to ensure that the wire information was properly being transmitted and safely being transmitted, it could be an issue between the purchaser and the seller.”

Rarely, he said, if this is reported quickly, the party notices the fraud and an attorney is hired, one may be able to freeze the funds. In this case, it would cause a delay of weeks while the person obtains “an order saying the funds have to be refunded, or if the bank is willing to work with you back or get the funds sent back and then wired to the proper account.”

If one is lucky enough to catch it that quickly, said Mr. Petrescu, the delay shouldn’t be long. However, if it’s not caught quickly and the fraudster withdraws the funds, this can cause a delay of months, potentially a year while one litigates who “should bear the cost of paying those funds in order to accentuate that transaction closing. It really depends on how quickly you catch it, but in most cases, it’s a pretty significant delay, and it creates a lot of hassle and then litigation for all parties involved in the transaction.”

Once you find out your transaction has been a subject of fraudulent wire instruction, said Ms. Gonzalez, the first step you must take is to alert the local authorities, “alert your … receiving bank in the case of a seller; in the case of a buyer, the sending bank that has sent the wire and ask them to place a hold and ask that those funds be returned.”

Acting quickly and taking initiative is vital.

“It’s so important to act quickly,” she said, “as quickly as possible, because we don’t want the receiving bank, if the bank has received funds for the fraudster, to then move those funds to other banks, which it becomes more difficult for us to identify the funds as they move along in the banking system….  At Berkshire Hathaway, we have the ability to assist our buyers and sellers and work with the FBI locally to identify these funds and assist our buyers and sellers to the extent we can.”

Since 2020, a steady increase in wire fraud cases has been noticed by real estate professionals.

Mr. Petrescu focuses on real estate related disputes, “so we’ve handled a lot of title cases. Title companies will refer us claims that they receive relating to title issue disputes. One of those involve … wire defalcation, or people who engage in wire fraud, or purchasers who wire funds to themselves, things like that. I’ve definitely seen those on the rise.

“Personally,” he continued, “I would say since like covid, after 2020, they’ve kind of steadily been on the rise again. I think that has to do with people kind of going to a more like mail-away closing model for real estate transactions, as opposed to an in-person transaction.”

People have become more comfortable using online notaries, using Zoom to effectuate closing and using emails and video conferencing as opposed to in-person closings, said Mr. Petrescu. This has facilitated people’s ability to pretend they are someone else, he said, or to “intercept communications that are being sent electronically; they contain wire information and use that wire information, or those communication strings to kind of interject themselves and kind of divert the funds.”

However, the move to create awareness for wire fraud has been longstanding.

“I have been doing this work for the last 10 years,” said Ms. Gonzalez. “I would say that this is something that we’ve been trying to educate the public and our agents about in the last 10 years. I think that bad actors are out there trying to make a quick buck.”

Asked if wired fraud has increased, Ms. Gonzalez replied she doesn’t know if it’s ever decreased. It is important to educate agents, buyers and sellers about wire fraud, “but in the course of a real estate transaction, you are excited to close on a deal and sometimes don’t realize when an email has been spoofed, and you act without taking the necessary precautions.”

One must act with care and slowly, she said. Urgency should never be present in a closing transaction. When receiving wire instructions, people should contact both their real estate agent and the closing agent “at a phone number that you independently verify as a buyer or seller to independently verify those wire instructions, not with the number that’s on the email, not with the number that maybe they have been texted to you, but that you actually independently confirm is the phone number of the closing agent, to verbally confirm those wire instructions. Especially, do not act on last-minute changes to wire instructions prior to a closing.”

Mr. Petrescu explained that people have moved on to conducting real estate closings in a more remote manner. Wire fraud is “something that you’re at a heightened risk of when you’re doing things remotely. Obviously, the most important thing is to pay attention to details, always dot your T’s and cross your I’s.”

Although wire fraud has taken the real estate world by storm, taking the necessary precautions and actions can help avoid being a fraudster’s next victims.

It’s very important for people to make sure they take time when dealing with instructions about funds, said Ms. Gonzalez, and place multi-factor authentication on their Gmail, Yahoo or Hotmail accounts.

“Frankly, because bad actors do watch those accounts carefully,” she said, “and when they see the word ‘closing,’ they will use it to take a look. What they do is deviate emails, and that’s how they become embedded into these systems and take over on behalf of a closing agent.

“Or usually,” she added, “what we see is that these, either the buyer’s account or the closing agent’s account, get hacked … and that’s where the chain starts. We really want to educate folks on being very vigilant to who it is that you’re dealing with and not being afraid to get on the phone and making sure that you’re dealing with the person who’s legitimate on the other side.”