When it Looks Like a Stradivari Violin but Isn’t: Protecting Yourself from Wire Fraud in Your Real Estate Transaction

Fine violins do not have serial numbers, but they do typically have a label inside identifying the maker and frequently the year and location where the violin was made. Many violin makers, or luthiers[i] as they are known, like to copy well-known instruments, sometimes even down to the label inside the instrument, and the most famous violin maker, Antonio Stradivari, is also the most frequently copied.

Usually, the luthiers do not try to pass their Stradivari copies off as originals.  Even if they were to try to do so, the instrument’s age and sound quality of the copies usually would fall far short of a Stradivari and give them away.

Where there is a question regarding the origin of an old violin, modern technology provides additional tools, such as chemical analysis of varnish and dating of the wood, which can further aid in distinguishing genuine violins from famous makers from copies. Yet, identification of old instruments remains as much art and conventional detective work as it does science.

Unfortunately, in the banking world, fakes may not be as easy to detect. Many title and escrow companies have started putting warnings on their e-mails, which read something like this:

Online banking fraud is on the rise. If you receive an email containing Wire Transfer Instructions call your escrow officer immediately to verify the information prior to sending funds.

The National Association of Realtors has recommended that its members include the following language on their e-mail signature lines:

IMPORTANT NOTICE: Never trust wiring instructions sent via email. Cyber criminals are hacking email accounts and sending emails with fake wiring instructions. These emails are convincing and sophisticated. Always independently confirm wiring instructions in person or via a telephone call to a trusted and verified phone number. Never wire money without double-checking that the wiring instructions are correct.

Unfortunately, computer hackers are increasingly targeting real estate investors and home buyers for wire fraud via phishing. Unlike the luthiers who make Stradivari copies, the hackers in the real estate transactions can create realistic communications which can fool even the discerning investor.

How Hackers Can Steal Your Money in a Real Estate Transaction

In August 2017, a Washington, DC couple filed a lawsuit against their title company, claiming either title company fraud or lack of adequate security measures. The couple received an e-mail appearing to be from the title company requesting a wire transfer for their closing.  Since the e-mail appeared legitimate, they wired more than $1.5 million.  When the title company said it did not receive the money, the couple had to come up with an additional $1.5 million to close on their home purchase.

It sounds like this couple and title company may have been the victims of an all-too-common hacking scheme, which has been occurring in real estate transactions in recent years.  Here is how the fraud is carried out:

A hacker gains access to the e-mail account for one of the parties of the transaction.  Real estate brokers and title and escrow companies are common targets, because they advertise their services and conduct many transactions.

The hacker monitors the e-mail relating to one or more transactions, gathering detailed information about the transaction only known to the parties to those transactions. The hacker may even participate in communications by sending spoofed e-mails to parties so as to better set up the hacker’s end game.

When the hacker sees that the transaction is nearing the closing so that the buyer might be amenable to wiring funds into escrow, the hacker acts.

The hacker sends the buyer an e-mail, which appears to come from the real estate broker or title/escrow agent (and which in fact may be from the hacked account).  The e-mail provides wire transfer instructions, along with detailed information about the transaction and the amount of money to wire into the “escrow account,” which make the request seem legitimate.

If the buyer wires the funds, they go into the hacker’s bank account, possibly in a foreign country, and the funds are nearly immediate withdrawn.  It may be one or more days before the buyer shows up for his/her closing, only to learn that the payment is not in escrow and in fact has been stolen.

How to Protect Yourself  from Wire Fraud in Your Real Estate Transaction

Given this very real and potentially expensive threat, every real estate investor should take the following steps to protect him/herself from these very convincing phishing schemes in real estate transactions:

When entering financial information into a website, be sure it is legitimate and that it is secure (it should start with https, rather than http).

If you receive wire transfer instructions via e-mail, call to verify the information.

Before calling to verify the wire transfer instructions, verify the phone number you are calling – do not use a phone number from the e-mail sending the wire transfer instructions.

Both real estate investors and professionals should take the following steps so that they do not become the “weakest link” in the security for the real estate transactions in which they participate:

Do not send financial or other confidential via unencrypted e-mail.

Keep your virus and malware software up-to-date.

Install all security patches to your computer’s operating system.

If you use your laptop or tablet on a public Wi-Fi be sure your firewall is turned on

Use complex passwords containing a combination of capital and lower-case letters and numbers, and do not use the same password for every account. Passwords consisting of the first letters of the words in a phrase you find easy to remember combined with a number may be a good option.

Do not open attachments to e-mails or click on links in e-mails unless you are expecting them.

Use an account that does not have administrator privileges for your everyday computer usage. That makes it less likely that malware will be able to make changes to your system.

Modern technology may provide tools which aid in the evaluation of old violins, but other modern technology also can be used by hackers to commit wire fraud in real estate transactions.  By using a combination of old-fashioned detective work and the thoughtful use of technology where appropriate and being aware of the existence of copies or fakes, both string instrument professionals and real estate investors alike can prevent themselves from being the victims of fraud.

[i]  Music Geek Fact:  The term “luthier” is used to describe someone who makes or repairs string instruments.  Originally, however, luthiers made only lutes. The term “luthier” derives from the French word for lute, which is luth.

© 2017 by Elizabeth A. Whitman

 

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.

SIZING UP IN VIOLINS AND INVESTMENT REAL ESTATE

If you have ever attended an elementary school instrumental music concert, you may need your parental pride to outweigh the general cacophony that is inflicted on your ears. Sometimes, however, you may find a group of violins that sound pretty good. Why is that?

Well, for technical reasons, string players can start younger[1]. As supply meets demand, violins can range from a 1/32 size up to full size.  Therefore, a child can start playing the violin on a tiny instrument at a very young age and “size up” on violins as he/she grows.

There are two strategies for obtaining violins for a child: rent or own. If you rent, you just pay each month for your child’s entire career.  If you choose to buy the violins, you will keep buying and disposing of increasingly more expensive violins.  I looked at the math and decided to buy my son’s violins.

My son started at age three playing a 1/32 size violin, which with an eight-inch body looked more like a toy than a violin. At age five, when he moved to a 1/10 size, we also found a need to move up a step in quality (and therefore, price) with each size increase.  A few months ago, my son traded in his ¾ size violin for a 7/8 size instrument, which is valued at 20 times the price we paid for that original 1/32 size violin nearly nine years before.

When we made the most recent violin purchase, I realized how our “investment” in violins is like real estate investment. A real estate investor might start small, with a single duplex.  That duplex might be sold and the money reinvested in a four-plex, and the four-plex might in turn, be sold and the proceeds reinvested in a more expensive three-story office building.  Eventually, through a series of purchases, sales, and reinvestments, the real estate investor may own multiple large apartment complexes, office buildings, or even high-rise mixed-use buildings.

Unlike with violins purchased for my son, a real estate investor has to think about taxes with every “trade up.” There are two ways that an investor might owe taxes upon sale of investment real estate – increase in value (i.e. the property is sold for more than what is invested in it) or a “recapture” of depreciation expenses that the investor took while he/she owned the investment real estate.  Although land cannot be depreciated, buildings can be, so there can be a significant tax liability upon sale of the investment.

One thing that helps real estate investors accomplish growth in is to use a Section 1031 exchange to defer taxes each time they sell an investment property and reinvest the proceeds in another “like-kind” investment property within 180 days.

When it was first created in 1921, a Section 1031 exchange required a literal swap of the two properties, as would occur if my son were to literally trade in his small violin at the violin shop for a larger sized violin.   For a direct swap, tax deferral makes a lot of sense.  It can be difficult to determine the “sale prices.”  Plus, unlike a sale and reinvestment, a sale doesn’t result in a cash payout from which taxes could be paid.

Therefore, over the years, Section 1031 exchanges have evolved so that they are more useful to real estate investors.

For instance, another option with violins, is to sell the smaller violin to another student and then use the money to buy the larger sized violin from the violin shop. Likewise, a real estate investor might choose to sell that duplex to Company A and use the proceeds to buy the four-plex from Company B.

For the past 30+ years, the tax law has allowed real estate investors to use what is known as a “qualified intermediary” to do the real estate equivalent by for instance, exchanging an apartment building sold to Company A with an office building purchased from Company B.   Without going into the detailed rules for this 1031 exchange, this would roughly equivalent to selling the smaller violin to another student, then putting the proceeds of the sale in a special savings account that could only be used to buy a new violin, once the desired instrument was located.

1031 Exchanges, however, are seen by some as a tax loophole for real estate investors. The Republican tax proposal “A Better Way” would significantly change the tax laws, including those on investment real estate. The proposal includes a full and immediate expensing of investment in place of depreciation.

Although this proposal might simplify the tax laws, it is likely to complicate the tax situation for many real estate investors. 1031 exchanges are not specifically mentioned in “A Better Way,” but some believe that 1031 exchanges might be abolished along with depreciation.  If that were to happen, real estate investors likely would be taxed on their proceeds upon sale of their real estate.  This would limit available cash for real estate investors’ to “trade up” and potentially could slow down the recovery of the real estate market.

Therefore, although it seems likely that there will always be a crop of younger violinists in need fractional-sized violins as you “trade up” to larger instruments, tax laws may not always make it as easy to “trade up” your real estate investment.

© 2017 by Elizabeth A. Whitman

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[1] Geek fact: A partial explanation is that strings of different length can reach the same pitch by changing the tension, while wind instruments require a certain length of the air column to produce a pitch.  So if you want to start your five-year-old on a bassoon, you may need to stretch him a bit first. Also, wind instruments require a developed mouth and certain number of permanent teeth, which are not required for string instruments.

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC.