Some renters will leap at the chance to exploit loopholes in the system

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Scammers lurk in the background of virtually every industry, and the multifamily sector is no exception. Some renters will leap at the chance to exploit loopholes in the system and take advantage of unprepared landlords.

“As a baseline definition, we classify rent fraud as any act of intentional deception by a renter to deceive the property owners to gain financial or personal benefit,” says Josh Albrechtsen, senior vice president and general manager of front office solutions at RealPage. “Fraud is evolving constantly. This is not a one-and-done problem solve. The trends and behaviors of the fraudsters indicate an ongoing chess match.”

Unfortunately, renter fraud is increasingly common.

In January, the National Multifamily Housing Council (NMHC) released the results of a fraud survey, which collected responses from 75 property owners, developers and managers. A whopping 93 percent of survey respondents stated that they had experienced fraud over the past 12 months. Additionally, 71 percent of respondents had encountered increased fraud activity in the last year.

Snappt, which specializes in assisting apartment property managers with document fraud detection, reported that of the nearly 3.3 million application documents its platform scanned in 2023, approximately 177,000 were fraudulent. That represents an average fraud rate of 7.9 percent, up from 6.6 percent in 2022.

This level of deceit can be a costly issue for landlords. Respondents to NMHC’s survey reported that they had been required to write off an average of nearly $4.2 million in bad debt over the past 12 months.

Why is Fraud on the Rise?

There are several potential drivers behind the recent uptick in fraud. The FBI Boston Division warned of a spike in rental scams in July 2022, noting that there had been a steady increase in losses from rental scams over the past three years. The statement attributed the spike to economic instability marked by surging rents, rising home prices and inflation.

“The issue of rent fraud has been on the rise in recent years,” confirms Chris Hansen, general manager of Cash Atlas solutions at Nova Credit, a credit bureau based in San Francisco. “This is due to various economic realities such as the rising cost of living and high inflation.

“And as rent fraud becomes more common, it also becomes more complex,” explains Hansen. “Tenants are now employing sophisticated tactics to deceive property owners and gain access to rental units, including identity theft, document forgery and credit manipulation.”

The COVID-19 pandemic also likely exacerbated the issue. Many parts of the leasing process that had been conducted in person prior to the pandemic moved online for public health reasons. While this made the leasing process more efficient in a number of ways, it also created new blind spots and vulnerabilities that fraudsters were quick to take advantage of.

Technological advancement has been a double-edged sword in general for the multifamily sector. Fraud tools are easily accessible and can proliferate through search engines and social media platforms such as TikTok and Instagram.

“We’ve always had issues with fraud,” emphasizes Caitlin Walter, vice president of research at NMHC. “There are various times throughout the leasing process or renting experience that a tenant could engage in fraudulent activity. That’s why we conduct background checks and establish tenant screening processes. Fraud has always been there.

“Over the past few years, however, fraud has become more and more normalized,” continues Walter. “There are videos on social media that will show you how to get around the screening process and how to access fake identities. That’s a big reason for the increase.”

Fraud Concentrated in Southeast, Texas

Jackie Impellitier, vice president of ZRS Management, an apartment management company based in Orlando, Florida, warns that property owners in some regions of the country may be at greater risk of fraud than those in other regions. “Our highest fraud locations are major metropolitan areas in the Southeast and Texas, such as Miami and Houston,” she explains. “The state of Georgia also tends to see a lot of renter fraud.”

Data from Snappt corroborated this claim, indicating that metros in the Southeast and Texas tend to see the highest volume of fraud.

In 2023, Dallas experienced an average fraud rate of 12.9 percent, the highest in the country, followed by Houston (12.2 percent), Atlanta (12 percent), Las Vegas (10.4 percent) and Charlotte, North Carolina (8.9 percent). Of the top 10 markets with the most fraud, seven were located in either the Southeast or Texas.

Snappt’s report for the first quarter of 2024, which gathered data on specific municipalities, also found that the top 10 worst cities for fraud were all located in the Southeast and Texas.

Lauderdale Lakes, a suburb of Miami, posted the highest rate of fraud, at 29.4 percent. The city was followed by the Atlanta suburb of Mableton, Georgia (24.3 percent); the Washington, D.C. suburb of Forestville, Maryland (23.7 percent); Fort Lauderdale, Florida (22.4 percent); and Sunrise, Florida, which is another suburb of Miami (20.5 percent).

The prevalence of rent fraud in these areas could be due to a variety of factors. Some municipalities may lack laws to protect companies and individuals from fraud or have lax penalties in place for fraud and identity theft. Some metros may have high rates of poverty. Some may have high rates of crime in general.

Daniel Berlind, CEO of Snappt, asserts that fraud tends to be most common in areas with active development pipelines. “It’s directly tied to the volume of multifamily units in those markets,” he states. “The amount of new development occurring in regions such as Florida and Texas is much more substantial, compared to other markets.”

Keep an Eye Out for Fake Documents

There are many different forms of renter fraud. Some potential fraudsters will create or alter payment and employment documents to qualify for an apartment.

This was one of the most common forms of fraud reported in NMHC’s survey. Of the survey respondents who had experienced fraud in the last year, 84 percent reported seeing applicants submit fake documentation such as fake pay stubs, bank statements, credit reports and employment references.

Additionally, 80 percent of respondents reported that they had seen prospective renters misrepresent information on their applications, and 63 percent said that they had seen applicants attempt to use fraudulent checks or other payment methods. Reportedly, there are even established businesses that sell these falsified documents.

“We have almost 1,000 companies in our fraud registry that we know create these fraudulent documents,” explains Berlind. “It’s a lucrative source of income for them, clearly. We use that fraud registry — as well as the datasets we have access to and our machine-learning algorithms — to identify programmatically when an applicant provides information that is coming from one of these fraud rings.”

One simple way to filter out would-be document fraudsters is to ask applicants to provide employment references. Contacting the applicant’s employer directly can help the landlord determine the legitimacy of the pay stub. Additionally, while an employer likely will not share specific information regarding an employee’s income without permission, the company can at least confirm that the person actually works there.

There are several strategies that property owners and operators can employ to spot a fake document. Snappt suggests asking applicants to produce both a pay stub and a bank statement so that the documents can be cross-checked against each other. The amount on a pay stub should appear on the bank statement as a deposit from the employer, and those two numbers should match.

Additionally, Snappt suggests keeping an eye out for formatting errors. Does the document look unprofessional? Are there any mistakes in the grammar and formatting? Is the font usage inconsistent? Are the digits and decimals out of alignment? These are all signs that the document may be fake or has been altered.

Sublease Shenanigans Surface

Another common type of renter fraud is illegal and unauthorized subletting. NMHC’s survey found that 67 percent of respondents had experienced this form of fraud.

Some tenants will lease an apartment with the intent of subletting to another person — even when subletting is forbidden under the terms of the lease agreement. To dissuade potential fraudsters, property owner-operators who don’t allow subletting should make it clear in the lease. The lease should also state what the consequences of unauthorized subletting will be, whether it’s a heavy fine, eviction or a potential lawsuit.

Some fraudsters may go so far as to commit identity theft to rent an apartment. Scammers will steal other people’s personal and financial information to avoid being screened during the application process due to factors such as bad credit, a criminal background, eviction history or simply because the fraudster has no plans of actually paying rent.

Identity theft is also a common form of fraud. NMHC’s survey found that 70 percent of survey respondents had encountered identity theft over the past 12 months.

To ward off potential identity theft, be thorough with identity verification during the renter’s application process. Snappt recommends calling the applicant’s personal and employment references to make sure that the information they provide is correct. Leasing staff may also be able to contact the applicant’s previous landlords.

It’s important to report cases of identity theft to the proper authorities. Identity theft can be reported to the FTC through the organization’s website. A report will be helpful when working with local law enforcement and creditors. Filing the report could also help the fraudster’s victim clear his or her name and financial standing.

Go On the Offense, Be Proactive

Fraud protection mostly comes down to preventing it before it happens. Evicting a fraudulent tenant can be a long and expensive process, and successfully taking the fraudster to court can be an even bigger challenge. There is not much in the way of insurance available to protect against renter fraud, and what does exist may not be worth investing in.

“A property insurance policy will probably not be very helpful in protecting against fraud, if only because those deductibles can quickly become hefty,” explains Impellitier. “Most of the time, your deductible won’t be met with the amount that fraud reaches. So, to file a claim against fraud to collect would cost you more than just protecting yourself on the front end.”

While there are various ways to avoid common types of fraud, it’s important to have a screening process in place to prevent renter scams, say industry experts. This can be done internally by educating property leasing staff on the red flags of a fraudulent application, or it can be outsourced to a third-party company that provides fraud solutions.

Landlords can use technology to fight fire with fire and protect themselves against fraud.  The prevalence of fraud has led to the proliferation of fraud detection software such as document and identity verification services. Snappt checks renter applications against its database to detect any tampering and will generate a report on the document’s authenticity.

“Speaking specifically to Snappt, we charge $18 per year per unit,” Berlind says. “If you have a 100-unit building, for instance, you’ll be paying $1,800 a year. Evicting a fraudulent tenant, however, can cost a landlord $7,500 in legal fees, lost rent, repairs and finding new tenants. So, stopping just one fraudulent applicant can result in a massive return on investment.”

However, given how common fraud has become, it’s ultimately very likely that every property owner, operator and manager will encounter it at some point. It’s important to have a plan in place to recover, should a fraudster slip through the cracks.

The FTC recommends that victims of fraud establish as much of a paper trail as possible. Collect all relevant communications and documents, such as the fraudster’s name or alias, social media profiles, email addresses, phone numbers, account information and statements, credit card receipts, checks and so on.

Additionally, report the fraud to the proper authorities. The FTC accepts fraud and identity theft reports through its website. Depending on the nature of the fraud, it may also be necessary to report the matter to the police and the district attorney.

In some instances, cases of fraud can be brought to civil court, provided the identity of the fraudster is known or has been discovered. Some cases of fraud, such as identity theft and mail fraud, can potentially be brought to criminal court. Unfortunately, this can be a long and expensive process, as fraud can be challenging to prove in court.

According to the U.S. Department of Justice, to prove fraud, the prosecution must first prove an intent to defraud, that the victim was justified in relying on the false information the defendant provided, and that it caused demonstrable monetary damages. This, along with the high cost of legal fees, can make litigation difficult in many cases.

“As renter fraud skyrockets, property managers must prioritize robust yet efficient tenant screening to combat fraud effectively,” states Hansen. “Utilizing source-based verification solutions in addition to advanced document fraud tooling is key to mitigating this risk. Failure to employ such measures invites operational inefficiencies and hefty legal or delinquency expenses — costly mistakes that can be avoided with the right tools.”

Source: Multifamily & Affordable Housing Business