Real estate value fraud – alive and kicking
Is your client purchasing a property with a significant increase in value within a short period of time? It may be prudent to ask some questions before proceeding:
- Have there been any renovations done on the property?
- Are there other factors which could explain the increase in value?
- Was it listed on MLS?
- Are real estate agents involved in the deal? and
- Has the property been recently transferred or mortgaged?
If there is no clear explanation for the increase in value, it is a potential red flag.
It is good practice to advise the lender in writing of the increase in value and seek the lender’s authorization on whether to proceed. If the lender authorizes you to close, keep a written record.
In Ontario, Rule 2.04(6.1) of the Rules of Professional Conduct of the Law Society of Upper Canada states:
“Where a lawyer acts for both the borrower and the lender in a mortgage or loan transaction, the lawyer shall disclose to the borrower and the lender, in writing, before the advance or release of the mortgage or loan funds, all material information that is relevant to the transaction.”
The Commentary to the Rule states that “material information” would be facts that would be perceived objectively as relevant by any reasonable lender or borrower, including a price escalation within a short period of time.