Nobody wants to get played. Especially when it comes to high value assets like real estate. But it happens more often than you think.
The five biggest scams targeting rental property investors and landlords are (i) real estate guru scams, (ii) tenant scams, (iii) contractor scams, (iv) overpayment scams, and (v) out-of-state investing scams.
We’ll talk about each of the scams and how to protect yourself against them. Let’s get into this!
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Real Estate Guru Scam
A real estate guru scam is when a so-called expert in real estate investing lures people into spending money on their courses, with the promise of fast and easy wealth.
These schemes are all about the upsell. They typically start with a free seminar. The seminar then promotes their “boot camp,” or other course, which may cost a few hundred dollars. The boot camp is then used to market their much more expensive full course, which can range in the thousands to tens of thousands of dollars.
We have all seen commercials for this right? I have received glossy postcards inviting me to a free seminar in some hotel where I will get to meet some random real estate investing celebrity. They promise to teach proven strategies to get rich quick in real estate.
Sounds ridiculous – and I would avoid them (the celebrity never shows up, by the way).
How to Avoid This Scam:
First, don’t bother attending these seminars – they are a complete waste of time.
There are much better options to learn about making money in real estate. The best option is to learn through many of the free and low-cost resources available. In fact, much of the information that these guru courses teach are found online for free.
There are books (my favorite is the Millionaire Real Estate Investor), blogs, and youtube videos that can provide you a solid foundation of knowledge. It’s how many successful investors started out.
Not sure where to begin? How about my step-by-step guide for getting started investing in rental properties. It’s completely free and right here on the website. I go through each step of the process for buying your first rental property.
You will find tons of concrete tips on how to get a down payment, locate the right area, find and analyze potential properties, and navigate the financing, contracting, and closing process. Check it out here.
Tenant Scams
Tenants can also scam landlords.
The biggest tenant scams against landlords are:
-Subletting without permission
-Lying about the people living in the property
-Unauthorized pets
-Rental application scams
-Engaging in overpayment schemes
-Using “professional tenant” tactics
Subletting Without Permission
Some tenants may try to rent out rooms in your property without your knowledge to make extra money. They may also use Airbnb to do the same thing.
These actions could take a toll on you and your property. First, short-term rentals like Airbnb may be illegal in your area. They could also violate HOA rules if your property is part of an association.
Also, there may be local rules that limit how many people can occupy a property. Your tenant may be violating these occupancy rules if they have other people living in your property.
These secret arrangements hurt you as an investor because they cause more wear and tear on your property. If you are paying any utilities, you are now paying more because of the extra people living in your rental. It just sets a poor precedent when your tenant lies to you.
How to Avoid This Scam:
In my business, I stress the rules against subletting before my tenants move in, so there is no confusion on this topic. Almost all of my tenants have been great so this is usually enough.
I conduct regular maintenance inspections (every quarter or so) of the property to replace the air filters and check for other maintenance issues. But while I am at it, I check to see if there are people living in the property that are not on the lease (or if there are other lease violations).
You can also check Airbnb listings to see if rooms in your property are being offered.
Finally, some people suggest putting in a security camera for the front door to monitor who comes and goes. I don’t do that because it seems a bit excessive, but it can certainly work.
Lying About the People Living in Your Property
This is related to the issue we just discussed. Some tenants will lie about how many people will be moving in or may invite “long-term” guests to stay with them without your knowledge.
These practices are problematic for the same reasons we discussed above.
How to Avoid This Scam:
You need to be clear in your lease that all adult residents need to go through the application process and need to sign the lease.
Also have clear limitations on how long guests may stay at your property and stress this point at the outset.
Finally, conduct routine maintenance checks as I discussed earlier to monitor for this type of violation.
Unauthorized Pets
I do not allow pets in my rentals, but many landlords do. Whether you choose to allow them or not, you don’t want tenants bringing in unauthorized pets. You may be ok with a 7-pound toy poodle in your 1 bedroom condo, but not with a 200 pound Great Dane.
Unauthorized pets can cause damage to your property and raise issues with neighbors.
How to Avoid This Scam:
You should make sure your lease requires prior approval for all pets.
But a lease is sometimes not enough.
As with other lease violations, routine inspections are key. Even if the tenant temporarily removes the pet for your inspection, you can usually sniff it out.
Rental Application Scams
Some unethical tenant applicants may lie on their applications. This can include falsifying their identity, credit report, job, and income.
How to Avoid This Scam:
You can protect against this type of fraud through a rigorous screening process. I always check government-issued IDs to confirm identity.
I also run complete credit and background checks for each applicant. They include a credit score, credit report, eviction report, and criminal background report. I use mysmartmove, but there are other options out there too.
I never accept a credit report provided by a potential tenant. Some will claim that they pulled it recently and don’t want to pay a fee for you to pull it again. Don’t fall for it. Some tenants are honest about this, but some are not.
I have fallen victim to a doctored credit report. I wound up starting eviction proceedings against that tenant because they immediately stopped paying rent. Luckily, they moved out before I had to evict, but I learned my lesson.
Finally, I call all references and confirm the truth about an applicant’s job and income. I require copies of the last two paystubs. But because documents can be faked, I also look up their employer and confirm it’s a real company.
You also have to be alert when calling their “boss.” As part of the scam, some people work with friends that will impersonate being the applicant’s boss. Call them and see how they answer the phone. Most people answer with a work-related greeting when they get calls at their work number. If the “boss” does not, you should be very suspicious.
Overpayment Scams
Some tenant applicants claim to be out of the country and say they can’t see the property. But they are still interested based on the pictures and description. They will send you a deposit that is more than the required deposit and ask you to send them payment for the difference.
You know the rest, right? Their deposit is fake and bounces in a couple of weeks while your check (or wire) is real.
How to Avoid This Scam:
This one is simple to avoid. Don’t bother with anyone who is not willing to meet you in person to view the property. And never accept overpayment (or underpayment for that matter) from an applicant.
Professional Tenant Tactics
What is a professional tenant?
A professional tenant is someone who games the system to avoid paying rent. They have a good grasp of landlord-tenant laws, including the eviction process, and use that knowledge to withhold rent and stall eviction. Their goal is to live rent-free at the property for as long as possible. They use these tactics repeatedly, moving from one property to the next.
Renting to a professional tenant can be devastating for your rental business. They know how to withhold rent for repairs (which are needed only because they intentionally break things for this purpose).
They know how to make partial payments of rent that can delay the eviction process. And they can hide their tracks because they know ways to get evictions expunged.
You need to avoid them at all costs.
How to Avoid This Scam:
You can do so by running a very robust screening process. I talked about my screening process already, but the key is to not gloss over anything you find. If they have gaps in their tenancy, you should look into why.
If their credit report shows bankruptcies, judgments, rent-related delinquencies, or overall poor credit, those are huge red flags. If they have evictions, run away.
No matter how good they are, no professional tenant is going to have a squeaky clean record.
They will likely spin you a story that attempts to explain it all. Don’t buy it.
Stick to your high rental standards and avoid this landmine.
Contractor Scams
As a rental property investor, you will need to make repairs from time to time. You may also want to spruce up your property to attract higher rents. Unless you are handy, you will be hiring a contractor to do this.
But there are scams here too. You may be approached by a “contractor” to perform work on your property at a highly discounted price. They may explain that they have leftover materials from another job or give you some other reason for the low price.
Once you hand over a deposit you never hear from them again.
How to Avoid This Scam:
First, never use unsolicited contractors. The best approach is to get referrals from people who have used a contractor before and were happy with the service. If that’s not possible, go online and comparison shop. You can go to homeadvisor.com, angieslist.com, or thumbtack.com to get started.
Look at the contractor’s ratings and reviews, how long they have been in business, and their credentials and insurance, etc.
It’s far better to pay a little more for a legitimate company than roll the dice on someone who comes out of the blue.
Out-of-State Rental Scams
Depending on where you live, buying rental properties outside your state may be an attractive option. For example, if you live in California, real estate prices are high and it’s hard to cash flow on your property.
Because of this, an entire industry has popped up offering investors “turn-key” properties that have high cash flow.
I won’t go into whether this type of investing is good. I simply want to highlight that there is a scam where some of these turn-key operators promise the investor a property that is in good condition, when in fact, it’s not.
The buyer makes an offer and the seller uses their inspector or contractor to provide a misleading report.
The investor buys the property (paying a price that is out of line with its condition) and then realizes they have been duped because the property needs a lot of work.
Don’t fall for this scam.
How to Avoid This Scam:
Visit any investment property before you buy it. Coordinate your own inspection while you are there. You may not need to go back again, but you should go at least once to check out the property and get a feel for the area.
Conclusion
There are many scams, pitfalls, and traps for the unwary rental property investor, but you can sidestep them like a pro if you see them coming. Hope these tips help you navigate through some of these landmines.
Any scams I missed? Do you have other tips on how to prevent scams for landlords and real estate investors? Let me know in the comments below!
