Why fraudsters may be partly behind your high rent (and other problems at home)

Why fraudsters may be partly behind your high rent (and other problems at home)
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Inflation, undersupply, high demand and exorbitant home prices are often reasons cited for why rents are high. But there’s another few people talk about, rampant fraud.

Since the pandemic, rental fraud has exploded nationwide. Nearly all respondents (93.3%) to a survey of members of the National Multifamily Housing Council (NMHC) and the National Apartment Association (NAA) representing 75 leading apartment owners, developers and managers, reported experiencing fraud in the past twelve months, according to the NMHC poll taken between November and January.

The fraud occurs when people use false identities to rent an apartment under false pretenses or for criminal purposes, owners and property managers say.

Fraud is bad for everyone. Landlords lose money and time evicting fraudsters, and honest renters may experience rent increases to compensate, property managers and industry experts said. Even worse, honest renters and staff may have to deal with unruly and sometimes, dangerous neighbors.

“It hurts everyone in the building, and everyone has to pay,” said Sharon Geno, president of NMHC, a nonprofit trade and advocacy group for the apartment industry.

Why fraudsters may be partly behind your high rent (and other problems at home)
Why fraudsters may be partly behind your high rent (and other problems at home)

Danger and damage

Fraudsters aren’t usually faking identities “to get in to house a family,” said Erin Outtrim, director of compliance and rent administration at Bernstein Management, a regional owner and property manager in Washington DC. “It’s usually for nefarious reasons.”

Property managers have reported fraudsters dealing drugs, trafficking sex, partying, renting out units they don’t pay for, destroying the apartments, and owning guns.

“In June 2023, a California resident took a sledgehammer to his unit,” said Laurie Baker, chief operating officer at Camden, a property owner and management company headquartered in Houston, Texas. “The unit was ‘down’ an extended period as we had to get city inspectors as part of the permitting process to rebuild and renovate the unit.”

Fearful staff and honest tenants may leave and tell others to avoid the building, hurting future revenue, too, property managers said.

A fraudulent California resident took a sledgehammer to his apartment. Due to extensive renovations and necessary city inspections to “rebuild” the unit, the unit couldn’t be rented for “an extended period,” said Camden Chief Operating Officer Laurie Baker.

High rents

Fraud-related losses can reach tens of thousands of dollars per incident, and some of that might potentially be offset with higher rents, industry experts said.

A 2022 study by the Urban Institute, a non profit think tank, that looked at the effects of COVID on housing showed landlords who missed rental payments were more likely to raise rents by higher percentages and were more stringently screening tenants.

Fraudsters also exacerbate the affordable housing shortage, housing experts say. They’re occupying units that honest people could use and hurting so-called mom-and-pop landlords who own and manage one to four units and constitute the bulk of affordable housing. Nearly 46% of the 49.5 million rental properties in the U.S. are 1-4 units, and about 70% are owned and managed by individual owners, the NAA said.

“They don’t have resources large providers have to screen tenants, and they’re disproportionately harmed by revenue loss,” said Dean Hunter, chief executive of the Small Multifamily Owners Association (SMOA) trade group.

Unable to absorb the losses, some end up selling their multi-unit home or condominium to buyers who may just live there themselves, Hunter said. That means even fewer affordable rentals and potentially higher prices for everyone because available units are in short supply.

Why is rental fraud surging?

Pandemic-related eviction moratoriums lasted well into 2021 preventing tenants from being evicted for almost any reason, property managers said. That emboldened fraudsters who knew if they could sneak their fake documents through the screening process, they wouldn’t get kicked out.

Fraudulent applications roughly doubled from 15% in February 2020 to 29% just six months later, according to fraud detection software company Snappt. In addition, 85% of landlords reported being victims of rental fraud during this period, up from 66% just one year earlier.

After the moratorium, fraudsters took advantage of longer eviction processes resulting from court backlogs and new regulations from politicians worried about homelessness, they said.

“A 70-something lady still has two renters who haven’t paid since COVID,” Hunter said.

Incentivized, criminals began using synthetic fraud to go undetected. Synthetic fraud uses a mix of real data like a Social Security number or other personal information with fake data to create a false identity. The mix of real and fake data make it difficult to detect.

“It’s the fastest growing type of fraud,” said Maitri Johnson, head of TransUnion’s tenant and employment screening business. It accounts for 85% of all fraud, NAA said.

How does synthetic fraud work?

Fraudsters obtain personal information from dark web marketplaces, phishing, data breaches, or stolen mail, wallets and other financial documents, said Lou Baugier, founder and chief executive of real estate technology firm Vero Technologies.

Then, they add fake data like an address or email and start building credit by applying for easily accessible credit products such as store or secured credit cards. They gradually increase their creditworthiness” by maintaining consistent payment histories, sometimes over months,” he said.

When fraudsters have an opportunity to include another authorized user on an application, they’ll add another synthetic identity to grow that fake identity, Maitri said. “So, one single synthetic ID’s matured into many. It’s very fruitful for fraudsters.”

Viral how-to social media posts and videos add fuel to the problem, experts said.

Victims are usually children, elderly and homeless individuals because they’re less likely to use credit or monitor their credit history, credit bureau Equifax said.

What can slow the fraud?

Landlords need to organize and educate lawmakers and the public. “There’s a strong tenant lobby but not one for small landlords,” Hunter said, adding that is why he founded SMOA.

Lawmakers need “to take a hard look at the issue given the significant and growing harm it causes to consumers, other residents, and rental owners and operators of all sizes, particularly the mom-and-pop investors,” Baker said.

During COVID, lawmakers and activists were focused only on tenant protections, which resulted in anti-landlord legislation that made it harder for landlords to uncover bad actors, landlord advocates say.

“These have an adverse impact on providing naturally affordable housing by small landlords,” Hunter said.

Property managers need to invest in technology. “You really have to have sophisticated technology to combat it,” Johnson said. “You can’t do it by being detectives, which a lot of people still do today. It’s important for the housing industry to look at robust and deep fraud solution beyond checking documents whether fake or not.”

Those solutions, though, can be “a huge cost for landlords to bear…which potentially means increase in rent,” she said. “So, there are downstream economic effects.”

Why fraudsters may be partly behind your high rent (and other problems at home)

While conventional theory says that homeowners should suffer more than renters from escalating interest rates, observed data shows that it tends to be the other way around – in most countries, and especially among those that have obligations towards employees of large parts of their housing sector (often “councils”, etc).

However, some of the observations are not in the expected direction or magnitude, nor pointing in the conventional (different in either reinforcement in case of a non-forfeitability premium, or fall in case of both risk- and non-forfeitability premium). There also seems little rationality to, and barely any empirical backing of, suspected causes such as collective preferences and other matters outlined by Karl Aiginger and Rudolf Winter-Ebmer in “Beneficiary Unwillingness” Economica 92: June 2013, 446-478.

High real estate prices are turned into rent through the investment of capital into the development and maintenance of the homes people live in and work from. In spaces where costs of deliberate action (of “crime”) are low – and property is subject to a legal responsible party – investments need to yield a return inclusive of risk.

The extra expected return on investment rationally asked to absorb the expected cost of damage is the rent risk premium, an investment demand augmenting rent though not manifested through rent. Crime – and policies targeted against it – thus affect rent – in addition to related, policy ingredients such as tenure rights and other institutions, aggregate savings, and credit maturities. Higher crime risk also means less severe health effects from rent for the renter – and potential other, currently undocumented econometrically consequences, for the property market and connected policy areas.

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