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On December 4, 2020, an escrow was opened with a title company in Arizona for Mr. and Mrs. Smith in the amount of $112,888 for the sale of a residential vacant lot to Mr. Jones.
On December 14, 2020, Mr. Jones sent via overnight delivery an official check in the amount of $150,000. The title company deposited the official check in its trust account knowing it would have time for the check to clear the bank prior to closing. The issuing bank honored the official check and transferred the $150,000 to the title company's trust account.
On December 22, 2020, the transaction closed, the deed recorded and the escrow officer disbursed:
| $102,590.30 |
to Mr. and Mrs. Smith |
| $9,031.04 |
in commission to the listing broker |
| $36,794.48 |
to an unrelated limited liability company (LLC) — supposedly owned by Mr. Jones — representing a refund of the overpayment |
Then, on January 7, 2021, the bank that issued the official check informed the title company's bank the official check was counterfeit and demanded a return of the $150,000. Ultimately, the bank had to return the $150,000 leaving the trust account short. The title company had to immediately replace the funds using money from their operating account.
After an investigation, it was discovered Mr. Jones was using an alias. He bought the property sight unseen and was not represented by a real estate agent.
The title company found out there was truly no way to formally unwind the transaction.
The title company has initiated an action against Mr. Jones for the court to determine ownership of the subject property in the name of the title company (since it ultimately paid the purchase price) in order to resell it in an attempt to recover a portion of its $150,000 loss.
Believe it or not, around the exact time of this crime, it was also being perpetrated in other states:
- In California, on a residential vacant lot sale with an $80,000 sale price and an $110,000 deposit.
- In Texas, with a $41,995 sale price and a $68,000 deposit.
The deposits were both official checks that were later recalled by the issuing bank as counterfeit.
Look for Red Flags
Generally, the high risk transactions comprise some or all of the following circumstances:
- Cash purchase
- Payment is made by official or cashier's check
- Payment is for much more than the amount required to close
- Low sale price
- No earnest money deposited
- Quick close
- Buyer is from out of state and purchasing the property sight unseen
After the file has closed, the title company is notified the official or cashier's check is invalid. The payment is reversed and deducted from the trust account leaving a shortage.
Based on the language in their banking agreements, banks have the ability to reverse any deposit credited to the trust account found to be fraudulent. This even applies to official and cashier's checks disbursed against after waiting the recommended time. Here is a sample of the language in one banking agreement:
h) "Cleared" Checks and Cashier's Check Fraud Warning -...Please be aware that fraud often occurs in relation to counterfeit cashier's checks that are presented to you as legitimate, and the fraudulent party seeks to acquire the funds from you at the time the bank makes the funds available but before the fraudulent check is returned unpaid.
The title company generally discovers the buyer is an imposter making it impossible to simply unwind the deal to recoup any losses.
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MORAL OF THE STORY
As a result of continued fraud attempts in multiple states and effective immediately, only wire transfers can be accepted for cash purchases of a vacant lot intended for a residence. This does not apply to large vacant land intended for commercial use or vacant lot take downs by a builder from a developer.
Settlement agents cannot accept personal checks, Official Checks, Cashier's Checks or any other instrument other than a wire transfer. If earnest money is due it must be sent by wire transfer.
In addition, do not accept any overpayment creating a situation where the buyer is entitled to a refund of more than $1,000 after closing. If an overage is sent, reject the wire.
Any refund due to the buyer must go back to the buyer. A refund cannot be assigned to another person or entity. Any request to transfer the refund to a third party should be considered a red flag warning for potentially fraudulent activity.
Regardless of whether a transaction comprises all the red flags listed above or not, settlement agents must accept wire transfers for cash purchase transactions for vacant residential lots. Notify the buyer immediately upon opening the order to allow sufficient time for the buyer to make any arrangements needed to close on time.
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