Real Estate Industry Tries to Solve Its Scammers Problem
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Here's your Money Briefing. I'm J.R. Whelan at The Wall Street Journal in New York. The real estate industry has a big problem with scammers and schemers to the tune of $150 million, and that was just last year. In a moment, we'll find out what the industry is doing to fix the problem. First, some money and market news you should know. With a new tax law in 2017 came a new set of tax withholding tables, but many consumers never updated how much the feds would take out of their paycheck. And as a result, many were paying too little and facing the possibility of a penalty on top of their tax bill. Well, the IRS is giving people in that situation a break by waiving the penalty.
How widespread is wire fraud in real estate and how much was lost in 2018?
It turns out there are 400,000 taxpayers affected by the changes brought on by the new tax tables. Now, ordinarily, people who haven't paid at least 90% of their federal tax bill come tax season can be penalized for paying too little up to that point. The IRS realized people were having a hard time adjusting to the new tax rules, so the agency reduced that threshold for the penalty to 85% back in January and then 80% in March. It goes back up to 90% next year. And by the way, the IRS says the average tax refund this year was $2,729.
The real estate industry has been hit with a wave of wire fraud schemes over the past several years. In fact, just last year alone, more than 11,000 victims have been swindled out of about $150 million. And Wall Street Journal mansion columnist Beth DeCarbo is on the line with us to explain how the industry is trying to fix the problem. So, Beth, in your column, you say the fraudsters have devastated the industry with scams and schemes over the past five years. Did the industry feel insulated from such problems?
I think real estate professionals by now know that there's a problem, that there are so many players in just one transaction, the buyer, the seller, both of their agents, lawyers, title companies, that just one weak link in this chain can lead to fraud.
Tell me about the experience of the owner of the Sun Title Company that you profiled in your column.
Tom Cronkright is the CEO of Sun Title Company based in Grand Rapids, Michigan. He was working on the sale of a $670,000 property. The buyer mailed a check for $185,000 to cover the down payment on the property and the title company's fees. Then Sun Title deposited that check in the bank and sent a wire transfer of $180,000 to the seller the following day. Five days later, they learned that the check had bounced for insufficient funds, and both the buyer and the seller vanished without a trace. They were just scams. Sun Title was out $180,000. Oh, wow.
Did they ever find out who did that?
It took them several years, and it was really their own shoe leather that got it back, and they were able to recover about $140,000, but they estimate that their cost of recovery exceeded the amount that they were able to get back.
And the owner of the title company learned a lesson, and he was actually involved twice in scams, and he also helped to develop a tool to help eradicate the problem.
That's right. That experience plus another scam involving an email hacker and a buyer led Mr. Cronkite and colleagues to create a company called Certified. It's an online portal that authenticates the identities of all the parties in a real estate transaction. and sends encrypted wire transfer instructions. So there's nothing done by email.
There are a few startups also that are aiming to eradicate fraud in the industry as well.
In addition to Certified, there's a Washington state title and escrow company called Modus that created a secure portal for real estate agents and their clients to transfer earnest money deposits. And similarly, two other companies, Trust Funds in Minneapolis and Zocum in Dallas, created ways to bypass emailed instructions and transfer earnest money using apps or portals on their own. But again, this is mainly earnest money and not the large sums that are involved in a down payment or paying off a mortgage.
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