Wire transfer fraud targets real estate transactions, demands agent and broker vigilance.
By David Tobenkin
Linda Hoverman O’Neal, CRS, a Charlotte, North Carolina-based RE/MAX Metro Realty real estate agent with 31 years of experience, remembers the feeling of panic that surged through her after multiple frantic calls from a buyer on April 21 led her to realize that someone had impersonated her online and persuaded a buyer, with whom she was working, to wire a $257,000 down payment to a bogus bank account in Texas.
“It was the worst thing I’ve ever dealt with in real estate—and I’ve had a Pacific Heights-like situation where it was almost impossible under state law to evict a squatter,” Hoverman O’Neal says. “Dealing with this incident cost me five days of my life.”
For those five agonizing days, Hoverman O’Neal worked with her buyer, her lender and others to try and retrieve the money. She was fortunate. Executives at Wells Fargo had flagged the transaction as suspect and placed a hold on the wire. Eventually, Wells Fargo reversed the wire and the home sale closed.
Hoverman O’Neal’s nightmare experience is becoming commonplace. Wire fraud involving diversion of the buyer’s earnest money deposit or down payments, or of the seller’s proceeds, is becoming widespread, resulting in client losses and lawsuits against real estate professionals:
- In Newport, Rhode Island, Keller Williams broker Connor Dowd says a client transferred $13,000 to a fraudulent account in September 2015 after a scammer hacked into one of his agent’s email accounts. The money was never recovered.
- In May, Hawaiian homebuyers sued Sioux Falls, South Dakota-based Keller Williams brokers, an affiliated agent and JP Morgan Chase Bank alleging that they negligently failed to prevent a loss of more than $150,000 through a similar wire transfer fraud.
- In mid-May at the National Association of REALTORS® mid-year meeting, NAR General Counsel Katie Johnson asked a group of real estate professionals whether they or someone they knew had clients who were victims of wire fraud. More than one-third of the audience raised their hands, Johnson says. “While there are no hard statistics, this practice is prevalent and appears to be increasing,” Johnson says.
There are, however, significant actions that practitioners can take to protect themselves and their clients, Johnson and other experts in the area note.
How the Game Is Played
Often the hacker uses an email attachment containing a virus to infect the agent’s or broker’s computer and gain access. In Hoverman O’Neal’s case, she says that she clicked on an attachment from a purported buyer, “Casey,” that the buyer represented to be a preapproval letter PDF file. That file infected her computer and gave the perpetrator the ability to see all emails and transaction document attachments exchanged with her clients. The impersonator maintained communications for six weeks, while deleting all email messages to and from the buyer, so that Hoverman O’Neal was unaware of the email exchanges, Hoverman O’Neal says. On closing day, just hours before the actual wire transfer was to occur, the perpetrator sent an email to the buyer with instructions to wire the money to a Wells Fargo bank account in Texas that the perpetrator had similarly hacked into.
Perpetrators often immediately withdraw the money from the destination account. Hoverman O’Neal says that it was her and her buyer’s enormous good fortune that the perpetrator used a destination account at the same lender the buyer was using. This led Wells Fargo to flag the transaction as irregular and to place a hold on further transfers. Had the destination bank been a different bank, the wire transfer likely would have gone through and both she and the buyer would probably have been out of luck, she says.
Preventing Wire Fraud
Hackers target the weak underbelly of the industry.
“A real estate transaction typically involves a significant amount of money, but the industry consists of independent contractors and is traditionally not tech-savvy,” says Tom Flanagan, vice president of technology at San Francisco-Bay Area-based Alain Pinel REALTORS®. “This makes us a prime target for cybercrime. The industry will have to choose between convenience and security.”
There are several important steps that real estate professionals can take to protect themselves. Better communication with buyers about transaction processes and implementing best practices for handling buyer payments are perhaps the most important ones, experts say.
Early in the relationship, brokers and agents should communicate very clearly in person with clients about how transfers of money will and will not occur, advise clients about the dangers of wire fraud, and explain how the agent or broker will structure the transaction communications to reduce such risks. In addition, brokers and agents should continue to discuss details of the transaction verbally throughout the relationship and not just rely on email, assistants or third parties, such as closing attorneys.
If at all possible, it is advisable for real estate professionals and their business associates, such as closing attorneys and escrow agents, to avoid using emails to convey the details of how and when to wire money and to inform buyers verbally as well as in hardcopy disclosures that they will not receive such emails and the details of such financial transfers.
Many in the industry are adopting advisory documents. In June, the California Association of REALTORS® produced a wire fraud advisory form to help REALTORS® alert clients to wire fraud risks, educate them on basic wire transaction protocols and require them to sign an acknowledgment of their review of the document. Some larger brokerages are also providing wire fraud advisory documents to their clients, Johnson says.
Johnson encourages REALTORS® to examine whether their errors and omissions insurance policies cover cyberfrauds, such as wire transfer scams. Coverage may require paying an additional fee for cybercrime addendum coverage, Johnson says. Hoverman O’Neal says she plans to add this soon to her own E&O coverage and that it will cost her $200 more per year.
The degree of potential liability of brokers and agents for wire transfer fraud facilitated through hacks of their systems is unclear, Johnson says. “That is the million-dollar question,” says Annie Fitzsimmons, a Washington REALTORS® legal hotline attorney, who has also produced a video about how to avoid wire transfer frauds.
Hoverman O’Neal says she is aware of two cases involving wire transfer fraud in her area alone in which brokers financially settled with buyers to forestall litigation and bad publicity that could be career damaging.
NAR provides cyberfraud crime tips.
