The Expert Podcast

Hundreds of thousands, if not millions, of new home buyers are entering the real estate market. These are first-time buyers who have never purchased a home before and don't know about some of the risks and dangers of buying a house. One of them is escrow fraud, and this is a potentially life-altering fraud where you could lose every dime you have while you're trying to buy a house. How does it work? Well, according to Yahoo Finance, the scammers are targeting a new generation of home buyers—people who aren't aware of this type of scam.

The way it works is when you purchase a piece of real estate, you have to transfer money, and there's a cybercrime that can happen. They’re talking about $350 million in cybercrime, which is up 64% over 2020. The cybercriminals find information about upcoming real estate closings by hacking into unsecured email and then posing as a legitimate representative of a bank. Let’s get more into the weeds on this and see how it works and how you can prevent it.

When you buy a house, the first thing you do is sign a contract with your realtor. The contract will dictate the price of the property, say $500,000, and you’re going to get a mortgage for $400,000. That means you have to come up with $100,000 in cash for your down payment. So, before closing, you’re going to send $100,000 to the escrow company, the title company, or whoever is handling the closing. Sometimes it’s an attorney. They’re going to take your $100,000, and they’ll combine it with the $400,000 from the bank that's financing your mortgage, put it together in a bank account, and then give it to the seller.

That’s the mechanics of what goes on behind the scenes. You’re not actually paying mortgage payments to the seller. The seller gets paid cash. If a seller does a deal for $500,000, they get their $500,000 on the day of closing. Then, you pay the bank back, and the bank writes a check for the mortgage amount—$400,000—and gives it to the seller so they can have the cash for their house.

Where the danger comes in is when you have to give that money to the escrow company, the title company, or the closing attorney. They don’t take checks. You can’t write a check for $100,000 because they are at risk, as they have to give that money to the seller on the day of your closing. If your check bounces, now they're out the money.

They don’t do checks. They don’t even accept cashier’s checks because a cashier’s check can be forged or lost or damaged. What they do is require that you wire transfer the money from your bank account to their bank account—$100,000. So there’s your risk. You have to wire transfer $100,000 from you to the escrow company. Once that money is wire-transferred, it's gone. You can’t get it back. You can’t stop payment on a check, and you can’t file a lost cashier’s check. It’s gone.

What happens is criminals will look up real estate transactions and find buyer information—who’s buying a piece of property—and send you an email that looks like it’s from the title company. It’ll say something like, “Here are your instructions for wiring the money: account number 1234, routing number 456. Send this amount so you can close on your house. Congratulations.” Then, you wire the money, and three or four days later, you get a phone call from the escrow company saying, “Hey, when are you going to send us your money?” You say, “I already did.” They respond, “Oh no, that’s a problem.” Worst-case scenario: your money’s gone, and if you don’t have another $100,000 laying around, you’re out of your house too. The seller isn’t going to give you the house without all their money, and the title company isn’t going to give you the deed to the house unless you give them the $100,000. If you wired it to the wrong place, you’re out of luck.

How can you prevent this? There’s a very simple way that costs less than a dollar to prevent this from happening. When you get the wiring instructions from the title company, first of all, you can call and verify that they actually sent it. Make sure they read you the account number and ensure it’s correct. Even after doing that, when you wire the transfer, don’t do it online at your computer. Go into your bank in person, give them the wiring instructions, hand them the instructions on a piece of paper, and have them do it at the branch of your bank.

Why? Well, because your bank can tell if that wire transfer account matches the name of the bank that the title company has. If the title company says their bank is Chase, and you give them an account number and routing number that goes to some bank in India or Russia or somewhere overseas, they’re going to know that. They’ll say, “Wait a minute, this doesn’t sound right.”

Even if the hacker found a way to get a routing number and account number that seems right, tell your bank to wire them 85 cents. That’s it—85 cents, or $2 or $10—something nominal. Whatever it is, it’s worth it. Why? Because the 85 cents, the five dollars, whatever it is, will help ensure the money goes to the right account.

Then, leave, go home, and wait a couple of days. Call the title company and ask, “Did you get that wire transfer for 85 cents?” If they say, “Yep, we got it,” then you know it’s the right account. It’s worth spending a little time making sure everything is right before wiring hundreds of thousands of dollars.

If you can, walk into the title company in person. Nobody likes a deal face-to-face anymore, but this could save you your life savings. Walk into the title company and ask them, “Hey, did you get my wire transfer for 85 cents?” When they confirm, ask for a printout to show that it came through. Take that printout and the account number back to your bank and tell them to wire the rest of it.

Make sure you don’t give them a new account number. Don’t give them a new instruction sheet. Use the same one where you sent it before. Now you know that your $100,000 is going to the place that’s already verified as the right pathway.

How hard is that? Even if you take all the extra steps I described—going in person to the bank and going in person to the title company—it might take an hour’s worth of inconvenient traveling and errands. But is it worth spending an hour to avoid losing your life savings? You can look up online plenty of articles about people who have lost hundreds of thousands of dollars—their entire life savings—that they’ve saved up to put down on a house. Not only do you lose your money, but you lose out on the house too because you can’t buy the house without the money.

If you don’t have the money, your mortgage won’t get approved. The buyer won’t close without all the money. So, verify the escrow and verify the account number before you send all of your money. It’s like all-in chips on the poker table. Make sure you know where it’s going.

It’s a simple thing, easy to verify. It might take a little extra time, but you’ll be much safer. Buying a house and transferring that much money is an incredibly important event in your life. Spending a little extra time protecting that investment and making sure that nothing goes astray is important. You can talk to your title company, escrow company, or closing attorney to verify all this and get more information. But that’s a very good strategy to make sure that your hard-earned money doesn’t go to some offshore account because they hacked somebody’s email or pretended to be somebody they’re not.