Real estate can be an incredible avenue for investment and wealth building. However, it is not without risks, and one of the most concerning risks buyers face is real estate fraud. A clear example of this danger can be seen in a recent case involving false representation and zoning issues with an investment property in Utah.
This blog will explore what real estate fraud looks like, the potential consequences, and how buyers can protect themselves.
What is Real Estate Fraud?
Real estate fraud occurs when someone deliberately misrepresents or conceals material facts about a property in order to deceive another party, often for financial gain. This can include falsehoods about a property’s condition, permitted uses, or even its rental potential.
These scams can deeply impact buyers, particularly those navigating complex transactions like a 1031 Exchange, where time and accuracy are crucial.
One recent case, handled by Keane Law, PLLC, highlights the devastating consequences of real estate fraud and how misinformation can severely harm buyers.
The Case of Fraudulent Misrepresentation in Utah
The Background
The case centers on a property located in Murray, Utah, listed on the MLS. Marketed as a unique offering—”two houses for the price of one!”—the property appeared to be an incredible investment opportunity, especially for a buyer seeking to reinvest proceeds from a prior property sale under a 1031 Exchange.
The MLS listing described the property as having two independent living spaces, each rentable, with the smaller Accessory Dwelling Unit (ADU) presented as a potential source of additional income. The listing agent explicitly told the buyer that, while the property wasn’t zoned for duplex or multi-family use, the units had been rented out without issue for years, claiming monthly rental income from the ADU of well over $1,600.
The Discovery
After purchasing the property, the buyer received a letter from Murray City stating that the ADU did not comply with zoning laws and could not be legally occupied or rented. This devastating revelation forced the removal of all rental provisions in the ADU, including key appliances, rendering it effectively unusable.
The Seller’s Misrepresentation
It was later uncovered that the seller had known about the zoning restrictions years earlier when they received a letter from Murray City requesting documentation proving the ADU’s legality. Additionally, subsequent licenses issued by the city explicitly permitted the rental of only the main dwelling, thereby confirming the ADU’s non-compliance. Despite this, the seller falsely denied knowledge of zoning violations in legally required disclosures.
Financial Impact on the Buyer
The misrepresentation resulted in significant financial losses. The buyer estimated damages exceeding $100,000, reflecting unusable square footage, lost rental income, and diminished property value. Such losses highlight the severe consequences of real estate fraud, fueling litigation claims against the seller, listing agent, and brokerage.
Key Signs of Real Estate Fraud
This case offers valuable lessons for identifying potential red flags during a real estate transaction:
1. Misrepresentation in Marketing
Always be skeptical of descriptions that sound too good to be true, such as “two houses for the price of one” in this case. Misleading MLS listings can entice buyers but often lack the necessary nuance or accuracy.
2. Incomplete or False Disclosures
Sellers are legally obligated to disclose known issues with a property, including zoning non-compliance or structural defects. False or incomplete Seller’s Disclosures can be a major indicator of fraud.
3. Overpromised Rental Income
Be wary if the projected rental income seems unusually high or the legality of multiple rentals isn’t explicitly confirmed with documentation. Local zoning laws heavily regulate ADUs, and relying on verbal claims can put you at risk.
4. Rushed Transactions
High-pressure tactics to speed up the deal—such as requiring quick inspections or waiving due diligence contingencies—might indicate an attempt to obscure potential issues.
5. Misleading Zoning Information
Claims about zoning exemptions or “special arrangements” should always be verified directly with local government authorities. A Zone Verification Letter may be requested.
Protecting Yourself Against Real Estate Fraud
To safeguard your investments, take these proactive steps:
- Do Your Due Diligence: Thoroughly investigate the property, including zoning laws and public records. A quick search could reveal whether permits are valid, particularly for additional dwellings or ADUs.
- Scrutinize Seller Disclosures: Carefully review all disclosures provided by the seller. If there are gaps or unexplained inconsistencies, seek clarification and have your legal counsel assess the documents.
- Verify the MLS Listing Details: Don’t take MLS listings at face value. Confirm claims such as square footage, number of units, zoning compliance, and rental potential through independent sources like the city’s records or an appraisal.
- Hire Experts: Working with knowledgeable real estate agents, lawyers, and inspectors can save you from costly mistakes. They’ll determine whether the information provided is trustworthy and complete.
- Understand 1031 Exchange Rules: If participating in a 1031 Exchange, ensure you fully understand the tax implications and legal requirements. The time-sensitive nature of these transactions often pushes investors to act quickly—an opportunity fraudsters may exploit.
- Request Written Confirmation: Verbal assurances about zoning, rental legality, or building permits are not legally binding. Always request formal documentation to validate these claims.
When Fraud Happens, Take Action
If you suspect you’ve fallen victim to real estate fraud, legal action may be necessary to recover your losses. The Keane Law PLLC team brings vast experience in tackling cases like the one detailed above. From pursuing claims of fraudulent misrepresentation to handling complex litigation, they’re dedicated to protecting buyer interests in disputes involving MLS listings and sellers.
Time is of the essence in real estate fraud cases. The sooner you act, the better your chances of securing compensation and holding wrongdoers accountable.
Final Thoughts
Real estate fraud is a serious issue with far-reaching financial implications. While innovative tools like online MLS systems and 1031 Exchanges have made investment opportunities more accessible, they’ve also created new vulnerabilities. The lesson from this Utah case is clear—knowledge is your best defense.
No matter how seasoned you are as an investor or buyer, approach each transaction with scrutiny and diligence. If uncertainty arises, rely on trusted legal and real estate professionals to ensure you get what you pay for.
If you’re facing a real estate-related dispute, whether it involves fraudulent disclosures or zoning misrepresentation, reach out to Keane Law, PLLC, for expert guidance and assistance.