Don't get swept away by multifamily's fraud flood.
Rental scams go up during recessions, priming 2023 to see a deluge of scammers with bogus apartment applications.
By Daniel Berlind, CEO, Snappt
Experienced property owners and apartment pros already know about the explosion of rental application fraud in recent years.
Squeezed by the initial spike in unemployment during the first months of the COVID-19 crisis, potential renters easily purchased fake pay stubs, credit scores, social security numbers, and bank account statements online to qualify for apartments they otherwise wouldn't have been able to lease. Some even went so far as to fudge background checks and provide fake references' contact information, such as phone numbers, in an effort to hide possible criminal activity or sensitive information that would disqualify them as potential tenants.
The result was a doubling of fraudulent applications received by property managers, from 15% in February 2020 to 29% just six months later. In addition, 85% of landlords reported being victims of rental fraud during this period, up from 66% just one year earlier.
Perfect fraud storm on rental listings in 2023
While those jumps were staggering, if trends continue this year, as many experts expect, fraud numbers in 2023 could dwarf those amounts.
This could happen due to a perfect storm of a weakening economy, increasing digitization, and a spike in overall fraud rates during tough economic times, a correlation documented by the Association of Certified Fraud Examiners at the start of the Great Recession.
Today, businesses and economists are increasingly predicting the onset of, at best, an economic downturn in 2023. Moreover, they have identified the warning signs of an outright recession in the worst-case scenario.
Past as prelude
If we look at history as a guide, fraud rates will almost certainly mushroom in 2023, should it come to that. At the peak of the Great Recession in 2009, the FBI's Internet Crime Complaint Center recorded a 22.3% increase in online crime reports from the previous year.
This happened again with the onset of COVID. Just as property managers saw an increase in housing application frauds at the beginning of the pandemic, the number of FBI online crime complaints increased by 69% between 2019 and 2020.
The potential for housing scams will worsen in the present day
In addition to the increase in absolute numbers, any future fraud increase will be magnified by the increasing digitization of almost all financial transactions.
Just consider that monetary losses from digital fraud in 2020 were 7.5 times higher than in 2009, according to the 2022 Global Recession Fraud report issued by SEON, an online fraud prevention platform.
This impending increase in fraud and bogus transactions has put the fraud prevention industry abuzz. Under current conditions, experts predict that "fraud will snowball in 2023."
Implications for multifamily
Given the increasing prevalence of online listings and leasing, self-tours, and unnoticed apartment move-ins during the pandemic, it's only logical to expect similarly high fraud rates in the multifamily sector during the next recession.
But while leasing application fraud will increase the number of scams originating outside apartment managers' walls in 2023, an even more troubling source of fraud could come from within.
The most recent annual report from the Association of Certified Fraud Examiners concluded that occupational fraud, in which an employee, manager, or executive deceives their employer, is the world's costliest and most common financial crime.
In addition, the real estate industry recorded the highest median loss due to occupational fraud in any sector, at $435,000. To top it off, employees in operational units—in multifamily, i.e., leasing and operations staff—accounted for the largest cohort of internal fraud sources.
The threat from within
It's not difficult to envision a front-line leasing associate whose overall compensation is tied to new leases succumbing to similar temptations if rents fall in 2023 and overall commissions decline.
After all, how hard would it be to overlook a questionable pay stub or bank statement when offered $250 to greenlight an otherwise compelling lease application? The opportunity, incentive, and likelihood to do so will only increase as the economy goes south in 2023.
Stemming the tide
While the challenges of rising apartment fraud in 2023 are clear, managers can take steps to level the playing field.
- Make the fight against fraudsters fairer by using fraud detection technology to identify red flags and digital manipulation of pay stubs and financial statements.
- Don't accept cashier's checks or wire transfers as payment for the application fee, first month's rent, or security deposit, as this will likely result in fraud (and losing your security deposit!).
- Raise the bar for applicants by asking for two months of pay stubs or bank statements, along with an application.
- Pick up the phone and call employers upfront to make sure the applicant is working where they say they are. Also, check the applicant out on social media and other apps. Does the story told in their application line up with their digital footprint?
- Pay your team of real estate agents a livable wage and give them "real jobs-like" benefits, such as healthcare and 401(k) plans, so they may have more to lose if they get involved with rent scammers.
- Incentivize your team to prioritize legitimate applications by tying future bonuses to a rental property's on-time rent payment score, not just new leases.
An increase in these common rental scams is almost inevitable, as the economy worsens in 2023. By preparing for this and getting your team involved in the fight early, you, as a property manager, can ensure you don't get swept up in the coming tide of fraud.