New Developments in Wire Fraud – The Sham Closing

This is the last in a 3-part series of recent fraud-related claims which came across my desk last summer while working as a claims attorney for Lawyers Mutual.  The first two articles (found here and here) focused on efforts of third parties to steal the proceeds from legitimate transactions, this last installment goes one step further and creates a completely sham closing. 

The fraud involved a vacant residential lot which was completely unimproved to the point of not even having a mailbox.  The owners were listed in the tax records as having a Florida mailing address, and a quick google search revealed they were an elderly couple. 

Shortly after tax bills were mailed in the fall, a Warranty Deed was recorded transferring the fee estate from the legitimate owners to a fraudster.  The deed was purportedly prepared by a North Carolina attorney and supposedly notarized by a Florida notary. 

The new owner quickly listed the property with a well-respected real estate broker at a favorable price.  A series of offers came in, and the fraudster elected to go with second highest bidder, who promised a quick closing.  At all points in time, the fraudster communicated exclusively via email with the real estate broker.

During the due diligence period, the fraudster developed cold feet and stopped communicating. After failing to contact the record owner, efforts were made to contact other parties involved in the transaction. This is the only way the scam was discovered.

First, attempts to contact the North Carolina attorney who allegedly prepared the sham deed uncovered that this attorney was on disability inactive status when she was to have drafted the deed. Further investigation unveiled that the listed notary was legitimately appointed by the State of Florida, however, the commission number did not match information contained in the Florida Department of State Records.  Finally, prior owners were contacted, and they revealed they did not transfer the property.  To the contrary, they intended to start building their dream home on that very lot in a few months so they could to be closer to their grandkids. 

Checking the license status of attorneys and verifying the commissions of recorded notaries is presently well outside the scope of a title search, and this scam would not be discovered under normal circumstances.  And honestly, the fraudster could have used the name of a licensed attorney in good standing and created a notary stamp with the correct notary number.   

As the Register of Deeds takes cash or money orders, I would suspect the payment source for the recording is not trackable.  No excise taxes were paid on the deed, so the fraudster was only out $26 in recording fees, plus the postage, money order fee and other small transactional costs.  The agreed upon sales price for the vacant lot was over $100,000 – meaning there was over a 200,000% rate of return for the criminal had the deal closed. 

Comparing this to other similar scams, I understand fraudsters frequently look for properties which are not owned locally and are unoccupied or unimproved (so there is no local mailing address).  By targeting unoccupied property without a local owner, no one is likely to question the ‘For Sale’ sign in the front yard. In situations in other states, administratively dissolved corporations and LLCs were targets, as were businesses which were delinquent in taxes. In other words, entities not actively managing the realty are targeted. 

In the present case, I do not think it was an accident the deed was recorded after tax bills were mailed.  Additionally, the deed was not e-recorded.  While plenty of deeds are still delivered to the courthouse, e-recording does require a higher level of sophistication and investment.  Relatively speaking, very few fraudulent instruments are e-recorded. 

I can see of no reason a title searcher would be alerted to a similar fraud, and if such a transaction was to close, you would assume the alleged Seller would deal remotely via email.  I could see a scenario where the attorney emails all relevant title documents, receives back the documents (including the notarized wiring directive) and disburses.  The ability to create fake notarized documents was discussed in detail in Part 1 of this series, and, unfortunately, is very easy.

This is one of the scarier scams I have seen, as I do not think current practices are likely to pick up the fraudulent nature.  It is standard practice in most of our state for Sellers not to be represented at closing and to have very minimal contact with the buyer’s attorney. 

The best way to prevent such fraud is for the Realtor to detect the scam before the property is ever listed.  To the extent we can educate Relators to be cautious of such transactions we should. 

Warning signs for attorneys and Real Estate broker include:

1. Property which recently switched hands shortly before listing.
2. The immediate transfer was for no consideration and not e-recorded.
3. The lot is vacant.
4. The lot is unencumbered. Unencumbered properties are more likely to be used in these scams as obtaining the payoff is likely to require the cooperation of the legitimate borrower. 
5. The Seller only communicates electronically.
6. The net proceeds are directed to a bank account in a name other than the record property owner.  

While these are warning signs, there are plenty of legitimate transactions which have many of these flags.  Developing one’s “spidey senses,” and encouraging the other professionals with whom we work to develop theirs, is now an ever-increasing part of the practice.