Just like at the height of the dot com boom, being at the height of this real estate boom is causing real estate related fraud to become more and more prevalent. The number of FBI mortgage fraud cases has already climbed from 534 for all of 2004 to 642 cases for just the first half of this year alone (2005)! The FBI report also specified that 26 states have more serious mortgage fraud problems than others.
The biggest scam today is people artificially inflating the prices of houses. A recent article in Business Week (the September 05, 2005 issue) has an article entitled “The Accidental Mortgage Detective” which gives a fairly good explanation of how they do this. The general idea is to buy and sell the property many times over within a certain time period to people within the same group. Each sale is priced slightly higher, to give the impression that the property is quickly increasing in value. And this can be done with multiple properties in the same area, even within the same street to give the appearance of an even bigger local real estate market boom. Eventually the prices gets inflated enough that it is sold to the general public for a sizeable profit. As soon as the properties are sold, they quickly lose value because the value really wasn’t there in the first place.
There are many other fraudulent methods, such as using fake identities, fraudulent documents, etc., but I believe this one is the most important and least likely to be noticed, especially in a high market. Just another thing to pay attention to when purchasing your properties, especially considering that 80 percent of the cases involve industry insiders (people who know what they’re doing).