Why this article matters: With its singular role in the industry, the DRE outlines the most common types of fraud experienced in the California real estate market.
Real estate fraud gone electronic
In a recent consumer alert, the California Department of Real Estate (DRE) outlines the most common scams doing harm in the real estate market today. Among the more well-known nefarious activities like mortgage fraud and elderly homeowner exploitation, the DRE also highlights the risk of compromised business emails.
This is especially important when wire transfers are involved.
It’s best practice to always verify with a phone call prior to sending funds via a wire. Further, real estate licensees need to guide their clients, and escrow officers, to beware of these types of frauds — or risk being held at fault when a client’s life savings disappears in a scam.
The real-life cost of fraudulent emails
Consider a buyer working directly with a seller agent to purchase property from a seller. The buyer is in escrow to purchase the seller’s property. The seller agent receives wire instructions for the buyer to fund the closing in an email which appears to be from the escrow company and forwards the email to the buyer. The agent does not confirm with the escrow company before forwarding the email.
Since the email with wire instructions is forwarded from the seller agent’s email address which the buyer used for communications in the past, the buyer complies with the instructions by wiring the funds. The buyer does not first check with the agent or escrow to confirm the transfer instructions as legitimate.
Unbeknownst to the seller agent, their emails were hacked disclosing the details of the wire transfer. Thus, the hacker was able to send false instructions to the seller agent’s email address for wiring the funds. The buyer loses the totality of their funds — nearly $200,000 — unable to recover the wired funds.
The buyer makes a demand on the seller agent and their broker for the lost funds, claiming they were negligent as they:
allowed their email to be hacked; andforwarded the false wire instructions without first confirming authenticity with the escrow company.
The dispute was eventually resolved by a court holding the seller agent and their broker liable and on the hook for 85% of the funds lost to the scam. The buyer is responsible for the remainder of their losses, since the buyer contributed to their loss by failing to use reasonable care to check with escrow to confirm the propriety of the instructions before wiring the funds. [Bain v. Platinum Realty, LLC, 2018 WL 862770, D. Kan. (2018)]
Best email practices
While this case took place in Kansas, the lessons are universal — for brokers, their agents and escrow officers.
Always check the wire transfer instructions.Caution your clients about email fraud.
It is the escrow or settlement officer who sends the buyer or mortgage lender a request with instructions for wiring funds. The transaction agents, that is the buyer agent and the seller agent, are not involved in funding.
To mitigate liability in a transaction, agents and their brokers best refrain from inserting themselves in exchanges of communication between escrow and the lender or buyer requesting funding by a wire transfer. The more people involved in the chain of instructions, the more opportunities exist for a fraudster to intervene and redirect the transfer of funds.
When nearing the phase of the transaction when funds will be wired — be it for the full purchase price or the down payment — a buyer agent needs a verbal conversation with their client-buyer about the potential for wire transfer fraud. The buyer needs to advise the client to always verify the wire transfer instructions with a phone call to the escrow officer before initiating the wire transfer.
Further, the agent needs to keep their account secure by regularly updating their password and by setting up multi-factor authentication, a security shield requiring users to provide two or more forms of verification for access.
