Inflated appraisals. Money laundering. Misuse of funds. Fake buyers. You name it, real estate has its share and more of scams and frauds. At times, fraud appears to be downright rampant, and sadly, the solutions that have been put forward so far have not made a discernable dent in the problem. What’s needed now is not more of the same, but rather, a fresh approach that attacks the causes of these types of crimes.
The traditional solutions to real estate’s fraud problem tend to involve laws and regulations, disclosures and paperwork, checks and balances, and law enforcement and punishment for wrongdoing. These solutions aren’t without merit: Laws and regulations set minimum standards of behavior. Disclosures help protect the public from misrepresentation and insider dealing. And enforcement and punishment take some bad actors out of play and force them to pay for their misdeeds. But aside from those benefits, these solutions also have proven to be largely ineffectual because they rely on strictures instead of cultural and behavioral changes in the industry itself.
What’s needed, and what’s long overdo, is a much clearer understanding of why real estate is so attractive to con men and con women along with new approaches to the problem that address those factors.
Fraud has been a fixture of real estate as long as land ownership has existed. The allure of real property, the appearance of easy money, and a history of land-related schemes and frauds act as magnets that attract people who are by nature inclined toward unethical and illegal behavior. The longtime pattern of fraud attracts more fraud, and until this pattern is disrupted, fraud will be difficult to curtail.
A tradition of heavy-handed old-time salesmanship is part of the cultural problem. Yes, professionalism has taken huge strides and gained a lot of ground over the years, but the image of real estate and mortgage brokers as back-slapping and tire-kicking used car salesmen is still alive, and such practitioners still operate in the business today, though perhaps increasing as anachronisms.
The old-time salesman is focused not on the best interest of the other people involved in his (or her) dealings, but rather entirely on his or her own pocketbook. This dollar-signs-in-the-eyes approach to business may nab the big bucks in the short term, yet it doesn’t serve the industry overall. Until the culture of hard salesmanship disappears altogether, fraud will continue to exist because fraud also places a higher value on money than fair and honest transactions.
The peculiar structure of the real estate brokerage business also contributes to a culture that enables fraud to occur without repercussions. The necessity for close cooperation among competitors makes finger-pointing, tattling and ratting out either outright fraudsters or practitioners who push the envelope of ethical and legal practices potentially risky and destructive to one’s own career. The perceived need to do business with these shady operators protects them from the consequences of their dicey behavior.
Real estate is by no means unique in this respect, as similar “codes of silence” exist to the detriment of other professions (e.g., law enforcement) as well. Yet in real estate, a reputation of being an honest broker and a stickler for ethics can alienate competitors whose cooperation is vital to success. Sadly, doing what’s right can chase away more business than it attracts.
Here are some suggestions of ways to tackle these problems:
More study. A reputable study about the culture and true cost of fraud in real estate might shine some light on why the industry attracts and protects bad actors and suggest other creative solutions to a problem that can’t be solved only through more laws or stepped-up law enforcement.
More education. Laws in most states require plenty of education to obtain and retain a real estate license. But more could be done in existing real estate courses to explain the real costs and harms of fraud and to encourage cooperation among honest brokers. Educators along with brokers and managers need to support business cultures that reward those who shun practitioners who behave as if existing laws, regulations and ethics codes don’t apply to them. Newbies face the toughest competition in the business, yet they nonetheless need to come on board with a much stronger commitment to honest dealings. Instructors need to explain how to identify fraud and what to do about it.
More mavericks. An industry that relies on cooperation and people skills doesn’t attack the types of people who tend to challenge norms even when they are illegal. More systems are needed within the industry and individual brokerage companies to nurture, approve of and reward mavericks who step up and act on their frustrations rather than fume in silence.
Marcie Geffner is a real estate reporter in Los Angeles.
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