6 Strategies for Handling Free-and-Clear Properties
By Lony-Ann Sheehan
Fraud is on the uptick across all industries, and real estate settlement and title insurance is no exception. Real estate transactions can be especially susceptible to fraud because of how lucrative they can be. For example, during a typical closing, a significant amount of money changes hands at one time, and personal financial data and banking information are often exchanged. Additionally, real estate closings happen every day, so with the millions of transactions that occur each year, a fraudster has ample opportunities to duplicate a successful fraud scenario, or try again if a fraud scheme fails.
For these reasons and more, real estate is ripe for fraud. But armed with the knowledge that real estate transactions are a popular target for fraudsters, there are things that every member of the industry can do to make it more difficult — if not impossible — for bad actors to be successful.
Let’s focus on a particularly vulnerable transaction type that real estate that fraudsters continue to target at a high rate: Transactions involving free-and-clear properties.
What is free-and-clear property?
When you hear someone say that a property is “free and clear,” it simply means that there are no encumbrances secured to the property, such as mortgages or other liens. The reason these are attractive to fraudsters is no other party has any right to the proceeds of a fraudulent sale or refinance.
One of the most common red flags for potential fraud is an unencumbered that has undergone a recent change in ownership. In this scenario, the property has been recently conveyed by a fraudster to themselves or a co-conspirator, who is now posing as the owner in a sale or refinance transaction. A fraudster can also assume a false identity as the true owner of free and clear property; in this instance, they may be using fake or forged identification documents.
Another scenario surfacing in recent years — which should be considered a red flag by title agents and real estate professionals — includes unencumbered property that consists of vacant residential lots of acreage. Since the land itself is vacant with an absentee owner residing elsewhere, the real property owner is not easily accessible. There is no way to go up to their door and ask questions, making it that much easier for a fraudster to assume their identity via electronic communications.
Title agents should be constantly wary of any title orders that come in as a “rush,” where the parties are seeking to close within one or two business days. When there is a pretext to speed up a sale, agents should immediately put on the brakes and take a closer look at the details of the transaction and the parties involved. In every case, they should take steps to contact the true owner of record as listed on local county tax records.
Where is this fraud occurring?
These types of fraud attempts are not limited to one geographical area, but rather are being flagged in multiple states all over the country. Consequently, Doma Title Insurance agents in all states who are conducting closings that involve free-and-clear property should employ extra scrutiny and closely follow Doma guidelines for identifying and preventing this type of fraud and its consequences.
What are best practices when title agent is handling a free-and-clear property transaction?
To assist in our shared quest to identify and stop fraudsters in their tracks, Doma recommends the following guidelines for agents when they are handling the sale or refinance of free-and-clear properties:
• Free-and-clear affidavit: When the property is unencumbered, always make sure to obtain an affidavit from the seller or borrower confirming there are no open mortgages or deeds of trust on the property. Remember that it is possible for a mortgage to be mis-indexed in a registry due to incorrect data or an incorrect legal description. This affidavit ensures an honest borrower will disclose any loans that they have taken out on the property.
• Assume fraud: If the seller or borrower in your current transaction acquired title within the last year, assume that the prior transaction may have been fraudulent, and take additional steps to convince yourself otherwise. Again, since a recent change in ownership is a common red flag for fraud, it should always be questioned and investigated. Obtain and review evidence of the prior closing, including the closing statement and title policy, if possible. Contact the former owner to confirm that they knowingly conveyed the property to the current seller or borrower. You may be surprised that in many cases, that property owner is grateful for your outreach and fraud prevention efforts.
• Personal contact: Make personal contact with the seller or borrower in your current transaction, and document the personal contact in writing for your file. Where did your order come from? Is it an email seemingly “out of the blue”?
This should cause some concern and additional scrutiny. If the seller or borrow in your transaction is an entity, such as a corporation or limited liability company (LLC), your personal contact should be with at least one of the individuals whose names appear in the state business registry who is authorized to act on behalf of the entity.
• Mail a letter: Use the good, old-fashioned method of mailing a letter to the record title holder at their address as it appears in the current tax records of the city or town where the property is located. The same letter should be used to contact the manager of record in the Secretary of State’s records for entity owners. The letter should present a summary of the proposed transaction, and your request for confirmation of the record titleholder’s initiation of the order. You can be certain that this small effort on your part will prompt a true property owner to reach out immediately to halt the transaction if they are not, in fact, selling or refinancing their property. Do this early in your order process to avoid spending time on a file that will cancel as a fraud.
• RON is your friend: If your transaction occurs in a state where remote online notarization (RON) has been implemented, the seller or borrower should execute the settlement documents using RON. This is because fraudsters are prone to fail the knowledge-based authentication (KBA) requirements and the credential analysis that is conducted by any of our approved RON providers.
• Use a provider to root out fraudulent identification documents: Doma makes available to our agents – at no cost – the use of Intellicheck® to assist them in validating IDs presented by parties to the transaction. At time of order entry, ask your seller or homeowner securing a refinance to validate their ID documents. If they are fraudsters they will run, not walk, away from you – thus avoiding exposure for your and your team to criminals in the settlement process. If they are real property owners, they will thank you for taking additional steps to protect their real estate interests.
3. Transactions involving divestment of the property from the federal estate tax lien.
You, too, can prevent fraud!
By remaining constantly aware of the possibility of fraud and being diligent about identifying red flags, like free-and-clear property risks, your agency will be in a good position to detect and prevent fraudulent transactions from occurring and resulting in loss for your company or customers. If you do encounter a fraud attempt, please immediately notify your Doma state underwriting counsel at [email protected] so that we can issue a confidential alert to make other Doma agents in your area aware of the attempt.
As a partner in preventing losses, your agency may also be eligible for a Doma CloseWatch award, part of a collaborative program between Doma and our agents which gives special recognition and a cash reward to Doma agents who successfully detect and prevent fraud. Doma agents and approved attorneys can learn more about our CloseWatch program within Agent Connect at https://agentconnect.doma.com/close-watch/.
Lony-Ann Sheehan is Vice President, Regional Underwriting Counsel for the Northeast Region of Doma Title Insurance, Inc.