Property management fraud is a serious issue that can cost business owners and homeowners a lot of money. Unfortunately, it is becoming more common as criminals find new ways to take advantage of people. In this blog post, we will discuss some tips on how to protect yourself from property management scams or corrupt property management companies.
Since the Great Recession, property management embezzlement has increased. Property managers are committing acts of fraud by overcharging tenants for repairs and maintenance that were either not performed or were unnecessary.
Key Takeaways
- Research the property management company. Look up reviews, contact past customers, or check out their social media presence to get a better understanding of how they operate.
- Get everything in writing. Make sure all agreements and contracts are in writing so you have proof of what was agreed upon if something goes wrong later on.
- Ask for References. If possible, ask the property management company to provide references from previous clients. That way you can get a better picture of how they do business.
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How Common is Property Management Fraud?
I recently came across this eye-opening study by Entrata that reveals just how much property management fraud has been on the rise.
You won’t believe this, but they found that fraud attempts have surged by 25% this year across all sectors in the US.
That’s a pretty alarming increase, right? This research gives us a clearer picture of how frequently these incidents are occurring, the sneaky tactics fraudsters are using, and how technology could be our secret weapon in fighting back.
But here’s the real shocker: in 2020 alone, the United States lost a staggering $1.9 billion due to real estate and rental fraud.
That’s a huge chunk of change! Even more surprising is that real estate transactions are targeted by fraudsters 70% more often compared to other industries. It’s like the real estate world has become a magnet for scammers.
It’s no wonder that when Entrata surveyed property management professionals, they found that a third of them are currently losing sleep over the threat of fraud.
And who can blame them? Over the past months, fraud has been spreading like wildfire, fueled by the COVID-19 pandemic. To make matters worse, 65% of those surveyed admitted they’re not fully confident in the anti-fraud tools they currently have in place.
In addition, many people (57%) have experienced more instances of payments being returned due to insufficient funds. This may be partial because it is difficult to identify this type of fraud. These problems underscore the importance of having fraud prevention tools in the property management industry, especially when it comes to processing applications and refunds.
| Statistic | Value |
|---|---|
| Increase in fraud attempts across all US sectors in 2020 (Entrata study) | 25% |
| Losses due to real estate and rental fraud in the US in 2020 | $1.9 billion |
| Increased targeting of real estate transactions by fraudsters compared to other industries | 70% |
| Property management professionals “very concerned” about fraud (Entrata survey) | 33% |
| Respondents “not confident” with their anti-fraud tools (Entrata survey) | 65% |
| Predicted increase in fraudulent activity for 2020 (Entrata) | 111% |
The impact of property management fraud is staggering. Take a look at these eye-opening statistics:
| Statistic | Value |
|---|---|
| Increase in fraud attempts across all US sectors in 2020 (Entrata study) | 25% |
| Losses due to real estate and rental fraud in the US in 2020 | $1.9 billion |
| Increased targeting of real estate transactions by fraudsters compared to other industries | 70% |
| Property management professionals “very concerned” about fraud (Entrata survey) | 33% |
| Respondents “not confident” with their anti-fraud tools (Entrata survey) | 65% |
| Predicted increase in fraudulent activity for 2020 (Entrata) | 111% |
These figures underscore the severity of the problem and the urgent need for property managers to step up their game in combating fraud. From the billions lost in 2020 to the staggering 111% predicted increase in fraudulent activity, it’s clear that the industry is facing an unprecedented challenge.
Ways Property Managers Commit Fraud
1. Taking advantage of unreported income
For example, the property manager rents out a vacant unit, but he or she forgets to update the vacancy status in the management system. They make excuses and claim to be working on filling the position when questioned about it. For a few months, while they pocket the cash, they conceal the unit’s actual status in the property management system. Then, even though the person has been working there for three months, they will not be officially recognized as an employee in the management system until the software is updated.
2. Creating fraudulent invoices
For example. They make up a fake company and have it receive a $1000 invoice for contract services, which the money then goes to. The perpetrators then steal the money by paying the fake invoice for services never rendered. They made the repairs unnecessary just to get paid and steal from the property owners.
3. Double Check Fraud
For example, two checks are written by the property manager: one covers the cost of utilities, and the other is for the manager’s personal use. Once the checks have been cashed and the money has been transferred to their own accounts, they will have the accounting system reflect that the funds were actually paid to the utility company.
Unless you reconcile that check with the corresponding expense on your P&Ls, you will never know. Your property manager may keep the books secret from you if they have full control over them. Something like what Debbie did might go unnoticed for years.
4. Receiving Kickbacks
For example, The manager of the building spends $3,500 on an air conditioner that should only cost $2,500. After the property manager has paid an additional $1,000 for the air conditioner, the air conditioning company will return $1,000 in profit to the manager. In my opinion, that goes against all ethical standards and the law. This is how they steal from you, and unless you’re on top of your game, you’ll have a hard time finding it.
Understanding these fraudulent practices is crucial for property owners. It’s equally important to know your legal rights and options if you suspect fraud. For more information on this topic, check out our comprehensive guide on Legal Protections for Property Owners Against Fraud.
How To Spot A Property Manager Who Committing a Fraud
1. Look for suspicious behavior
Financial transparency is an important part of personal and financial life, and when it comes to rental properties, it’s especially key. If you ever feel that your property manager is being overly secretive about their financial dealings or is taking too long to provide reports, it’s best to keep a close eye on the books.
Seek advice from an accountant or other professional who can provide assistance and can help you make sure everything is in order. Nothing is more important than reassurance when it comes to rental property finances!
2. Watch out for discrepancies in the books
As a commercial real estate investor, you want to make sure your rental properties are being managed properly. Unfortunately, tenant fraud is still a common problem, so it’s important to keep an eye out for any suspicious activity that could put your investments at risk.
The most common type of fraud occurs when the property manager takes money from tenants and then makes false entries in the books to hide the payment. To guard against this, it’s wise to carefully monitor all incoming and outgoing payments on behalf of the tenants and take appropriate action if any discrepancies are discovered.
With these proactive steps, you can ensure that your commercial real estate investments stay safe from fraudulent activity.
If you want to know more about how to be a successful CRE investor and protect your investments, make sure to read our comprehensive guide on How to Be a Successful CRE Investor.
3. Run background checks on managers
Before hiring a property manager, it is important to do a thorough background check. Look for any signs of fraud or deception in their past. If you find anything concerning, it may be time to find someone else to manage your property.
4. Increase your security measures
Be sure that all of your financial accounts and processes have the highest levels of security. This means implementing two-factor authentication, making sure your passwords are secure and regularly changing them, and randomly auditing books to ensure accuracy.
5. Check with your tenants
If you receive complaints from tenants about their property manager, it may be time to investigate further. Talk to other tenants in the building and see if they have similar stories. This could help you uncover any fraudulent activities that may be taking place.
6. Consider Outsourcing Property Management Services
If you don’t want to deal with the headache of dealing with these potential problems, then it might be best to outsource your property management services to a reputable company that specializes in this area of expertise. These companies have processes and security measures in place that can help ensure your rental property is secure and receives the best possible service.
How to Protect Yourself from Property Management Fraud
1. Regularly review and reconcile accounts
It is important to regularly review and reconcile your financial statements so that you can spot any discrepancies in the books immediately. Make sure all payments are accounted for and double-check to ensure that everything adds up correctly.
2. Maintain control of all finances
Do not allow a property manager to have full control of the books. You need to be able to access records at any time, and all financial information should be transparent and easy to understand.
3. Monitor payments closely
The best way to protect yourself from fraud is to ensure that all payments are tracked properly. Check-in with vendors regularly, and make sure that all payments are accounted for and made on time.
4. Establish a strong relationship with your property manager
It is important to create an open line of communication between you and the property manager so that any concerns can be addressed quickly. Make sure to ask them questions about their financial practices, and demand transparency in all aspects of the business.
5. Implement robust tenant screening processes
One of the best ways to prevent fraud is to ensure you’re working with reliable tenants. Implementing thorough tenant screening processes can help minimize the risk of rental scams and other fraudulent activities. Learn more about Effective Tenant Screening Processes to protect your property and investments.
6. Put everything in writing
Make sure that all agreements and contracts are written out clearly so that everyone involved is aware of their responsibilities and obligations. This will help to ensure a smooth transition between tenants and protect you from any potential fraud or mismanagement.
7. Implement stronger security measures
Make sure that all financial accounts, processes, and access points are secure. Implement two-factor authentication whenever possible, and regularly audit the books to make sure everything is accurate.
3 Ways to Prevent Property Management Fraud
1. Setup a good internal control system
A property management business has a lot of responsibilities when it comes to finances. To ensure that everything runs smoothly and all your financial processes are managed correctly, it’s important to have a good internal control system in place.
A few steps you can take to make this process more efficient include setting up multiple levels of approval for payments, periodically auditing your property management software, and properly documenting records. Doing so will help you create an environment with responsible spending and efficient money management.
2. Do your own accounting and separate accounting duties
Do not let your property manager keep the books. This can lead to potential fraud or mismanagement. Instead, do your own accounting and separate out different duties such as payments and bookkeeping.
3. Have control over bookkeeping
Choose a bookkeeping software that you have control over. Make sure the software is up to date and secure, and that all access to information is limited to trusted personnel. This will help protect you from potential fraud or mismanagement. By following these tips, you can protect yourself and your rental property from any fraudulent activities. Investing in a reputable property management service is the best way to ensure your rental business runs smoothly and securely.
Property Management Fraud FAQs
What is management fraud example?
An example of management fraud is the Enron scandal, where executives manipulated financial statements to inflate profits and hide debt, ultimately leading to the company’s bankruptcy and significant losses for investors and employees.
Who is responsible for management fraud?
Management fraud is typically perpetrated by high-level executives who misuse their authority for personal gain. This can include actions like financial manipulation or embezzlement, often facilitated by weak internal controls within the organization.
What causes management fraud?
Management fraud is often caused by a combination of perceived pressure, opportunity, and rationalization. Factors include financial difficulties, aggressive performance targets, lack of oversight, and a corporate culture that condones unethical behavior.
What are the common issues in property management?
Market Rents, Poor Tenant Screening, Improper Maintenance of Property, and Inaccurate Accounting are some of the most common property management issues.
Are property managers regulated?
There is no overarching regulation of the property management industry; however, members of a trade group are held to certain standards of competence and conduct.
Conclusion
Being a property owner comes with a lot of responsibility. You have to make sure your tenants are happy, your property is well-maintained, and you are compliant with all the rules and regulations. It’s a full-time job! So when you’re looking for property management services, you need to be extra careful to avoid being scammed.
Luckily, there are some telltale signs of property management fraud. If you know what to look for, you can protect yourself from becoming a victim. If you have any questions or would like to schedule a free consultation, give me a call today.
I would be happy to help you navigate the world of property management and find the best solution for your needs.
