Increasing Real Estate Investing Scams in COVID-19


The coronavirus pandemic has brought a wave of uncertainties to the commercial real estate industry. As a result of the pandemic, real estate agencies have been dealing with different types of issues.

The safety of the employees, their tenants’ ability to pay rent, different types of cost reductions, lender negotiations, and managing the business remotely are some of the issues that real estate agencies are dealing with, to name a few.

There is a significant concern that is often not on many agencies’ radar, which is a fraud. The majority of the real estate companies are held by private companies that have not invested in the internal control systems, which are necessary to prevent and even recognize fraud.

After the onset of the pandemic, the real estate companies realized how vulnerable they are to fraud, which has heightened the financial and reputational risk of real estate agencies and staked its income and profits in general.

The Five Most Common Types of Fraud in CRE

According to the recent ACFE-report, here are the five most common types of frauds in the real estate sector:

  • Improper billing
  • Misappropriation of assets
  • Payments tampering
  • False expense reimbursements
  • Check to tamper

Most real estate agencies have experienced at least one or two of these frauds. While most of the organizations consist predominantly of ethical workers and employees, the harsh reality is that the covid-19 pandemic has created a ripe work environment for fraudulent activity.

It has been observed that during times of economic distress, there is increased anticipation in the level of fraudulent activity in all industries, including the commercial real estate industry.

The covid-19 pandemic, coupled with a high unemployment rate, has created the perfect storm of an environment of great uncertainty and stress among the masses.

People are more concerned than ever about their job security, health and safety, and their rent-paying ability, along with other expenses of daily life.

Additionally, the financial pressures on the real estate companies are leading to significant stress at all levels of the organization to deliver results and “bring in numbers.”

Thus, it is more important than ever for the senior management of real estate agencies to be fully aware of the internal and external drivers of fraudulent activities and do all that is possible to keep fraud in check.

How to Watch out for the Red Flags?

Despite the pressure of bringing in numbers and the burden of broader tactical and strategic issues that real estate managers and executives have to deal with daily, real estate agencies’ top management should be looking for red flags of fraudulent activity. Here are a few red flags you should be watching out for.

  • Changes to bonus or salary entries in the payroll systems of the agency.
  • Lenient approval processes might be put into effect due to remote working, particularly cash payments.
  • A rise in the new vendors added to the payables roll, which has not been vetted for, and that could be employee-related.
  • If the frequency of transfers to particular vendors is rising unexpectedly.
  • Unauthorized movement of funds among different property entities.
  • Bank reconciliation statements are prepared late or by employees who were involved in the cash disbursement processes.

These are some of the red flags you should be watching out for as an initial step to prevent fraud and to keep the organization in check. Top-level managers need to understand that it could be much easier to hide moments of funds in the mirror of ownership entities across different properties, especially in real estate agencies.

The simple solution to this is to keep control of cash and maintain the policy of separation of duties, even when the employees are working remotely.

The simple rule of separation of duties is one of the best tools of an internal check, which helps identify and prevent fraud.

Best Practices to Prevent Fraud

Mitigating fraud, like all control functions of an organization, has three primary Defense lines, which must be taken care of by the top management of any real estate agency. Here is an overview of the three lines of Defence and how you could best use them to prevent fraud in your organization:

Number one – Operational Management

Risk mitigation in a real estate agent starts with the tone at the senior-most level. The senior management should be evident in its commitment to combating fraud by making the terms and policies clear to all employees of the form and explaining why it is vital to take an active role in fraud prevention at all organization levels.

Management should identify and give more importance to functions that have the highest risk of putting controls in place by recognizing the difficulties created by a remote workforce. The next step for the management is to become an active part of the review process of transaction accounting, cash reconciliations, and billings. 

Number two – Financial and Risk Management

The top management concerned with financial accounting and payroll and property management teams should start identifying high-risk functions and bringing policies that review accounting policies’ current efficiency.

They must be consistent and have constant internal check processes, including tools like segregation of duties and periodic reconciliations.

Many Property Management firms have built-in controls and Analytics where the management receives regular and effective red flag reports on the passing of entries with targeted types of transactions.

For example, An increase in the number of unusual amounts of transfers to a particular useful from time to time is a whistle-blower and a red flag that should catch top-level managers’ attention.

Number three – Internal and External Audits

When a real estate agent conducts an internal audit review, which will be modified this year to consider the added risks of a reduced workforce working remotely. High priority functions that are most prone to fraud should be targeted for close review.

Any internal controls which were suspended or made lenient during the pandemic should be documented and internally monitored. Certain types of internal audits must be done off-season or off-cycle so that the team which is performing high-risk functions is not alerted or cautioned in advance.

Since most private real estate agencies do not have such internal audit infrastructure, it might be necessary for the management to consider utilizing an external auditor or another type of third-party agency to conduct such internal or external audits.

These are the initial three lines of necessary internal checks every real estate agency must adopt. One should remember that real estate agencies should act swiftly to adapt their risk management and control framework immediately according to the covid-19 situation and put proper fraud mitigation procedures in the system.

A real estate agency that is quick to identify gaps and vulnerabilities will be fast and building new controls and monitoring systems, thus ensuring proper mitigation of losses.

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