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Note Fraud

Would You Know It If You Saw It?

Unscrupulous individuals can do inconceivable things with personal –and public–information ranging from the relatively minor infraction to the abhorrently mind-boggling scam. Note Professionals may have to put on their Sherlock Holmes hat when they find that their note holder’s explanations of events or circumstances do not seem to hold water.

Note Professionals must be vigilant of red flags that may signal that they are in the midst of a legal matter that involves note or real estate fraud. In most cases, we might be tipped off by fact patterns that note holders or potential note holders provide that don’t add up or are completely unsupported by the documentation they present. In some cases, note holders may be the victims themselves, but sometimes they may be consciously participating in the tangled web of note and real estate fraud that they themselves have initiated.

Fraud in its simplest form is deliberate misrepresentation and deception. Fraud in action means that one deceives another by misrepresenting information, facts and figures.  According to the Federal Bureau of Investigation (FBI) note and mortgage fraud is “material misstatement, misrepresentation or omission relating to the property or potential note and mortgage relied on by an underwriter, investor or lender to fund, purchase or insure a loan.” With this working definition we see that note and mortgage fraud can be committed by both individual borrowers and industry professionals.

While anyone may fall prey to fraud, the groups most targeted by scammers are usually the elderly, property owners already in foreclosure, and individuals with low incomes.

What should a Note Professional do when he or she believes that his or her note holder is involved in note and mortgage fraud? The first step is to understand the types of note and real estate fraud that are popular with scammers. The second step is following the paper trail to get to the bottom of the situation.

As a Note Professional you’d be foolish to think you couldn’t be fooled in a note transaction. While the majority of note sellers, note holders, property buyers and payors are presumably honest, the Note Professional may find that there are a number of active and unwitting participants – a list of players that may include mortgage brokers, loan officers, escrow officers, closing attorneys, buyers, sellers, straw men, investors, bankers, and title companies.  Be alert for the warning signs of unscrupulous note holders, sellers, buyers, payors and real estate agents.

The following are some examples (by no means all-inclusive) of the types of note and mortgage fraud that I have encountered in my many years as an active participant in the note industry. Of course there may be completely legitimate note and real estate transactions that have similar circumstances as the fraud outlined below, but a Note Professional should do his or her due diligence to confirm his or her hunch that something may be awry. If the hunch proves to be true, get out of the transaction immediately and you will have saved yourself lots of problems in the future.

• Illegal Flipping. Flipping involves buying a property and then quickly selling it at a price that is well above its appraised value, it is a well-known practice in the real estate industry. However, there is a fine line between flipping for a profit (which is legal) and illegal flipping. (Check the rules of the local jurisdiction of the subject property secured by the note for more specific information.)

Flipping is a legal and ethical practice when all representations of the property condition and value are true and accurate. This is a legitimate business transaction and there are many in the real estate markets that make an honest living flipping properties. However, flipping can also be a fraud-for-profit scheme that may lead to devastating consequences.

Property flipping becomes illegal and a fraud-for-profit scheme when a property is purchased and resold within a short time frame at an artificially inflated value. The flip typically involves a fraudulent appraisal, which may indicate that renovations were made to the home, when, in fact, there were none, or the renovations consisted only of minor cosmetic improvements.

Note Professionals are highly aware of this type of fraud and decline the purchase of notes secured by these types of properties when it is suspected and uncovered.

• Fraudulent Note Creation. This is old-fashioned theft. The criminal in this situation actually obtains the personal information of the victim and uses this information on note and mortgage documents. In addition, the criminal physically forges the victim’s name on the note then tries to sell the note. If purchased the note buyer typically receives one or two payments then the note payor is gone! 

We take many steps these days to ensure that the seller of the note and payor on the note are real. When a Note Professional has any indication that the payor or note seller may not be who they represent themselves to be they decline the purchase of such notes immediately.

• Land Fraud. This happens when companies obtain information about potential homebuyers and sellers from mailing and call lists. The companies then engage in a direct mail and telemarketing campaign, promising huge profits and gifts if the sellers agree to buy land from the company. These companies sometimes sell unimproved, recently purchased lots of land that they purchased for $1,000 or $2,000 to unsuspecting buyers for up to $50,000 and carry the note on them with the hopes of selling the note to naïve, inexperienced and unknowledgeable note investors for their profit.

Not many Note Professionals buy or broker land notes for exactly this reason.

• Straw-Man Scheme. A straw man scheme is when a sophisticated criminal uses the credit history of another, less sophisticated “straw man” to obtain a property with a seller financed note. The seller of the property is also involved in the scheme. The more sophisticated criminal convinces the straw man (who may be unaware the seller and sophisticated criminal are in cahoots) to sign the note and buy the property from the seller.  The sophisticated criminal and property seller then tries to sell the note, and the straw man usually gets a small percentage of the proceeds when the note is sold. The straw man is also the one who usually gets arrested.

Many Note Professionals do not know anything about any of these types of fraud. Note Professionals should not sign documents to purchase a note when they do not understand the entire situation and story behind the note. Note Professionals should let note holders know that something sounds suspicious, and should then ask questions and proceed with caution. It is easy for Note Professionals to get caught up in the moment of a note purchase transaction in which they could stand to receive a significant amount of money or future return; however, Note Professionals should be reminded to always verify the information that they are being told. Often, Note Professionals get entrapped in fraud because they are told one thing while the documents reflect something different, because they ignore the red flags or because they do not do proper and thorough due diligence.

If after some fact-finding, the Note Professional suspects that a note holder or players in the note transaction are involved in some sort of fraud, he or she should instantly cancel the transaction and encourage the note holder to contact the proper authorities so they may begin a criminal investigation while the trail may still be hot and the players may still be traceable.

If a situation does not pass the “smell test,” the Note Professional should proceed with caution and diligently gather information about the various players and keep in mind the scenarios outlined above. We do not see fraud very often but when we do we recognize it, we ask the proper questions for clarification and if it cannot be cleared up we step away from the transaction. Now you are aware and awareness is the first step in recognizing note and mortgage fraud.  Remember success demands action, keep on marketing, it’s going to work!  TWITA! (That’s What I’m Talkin’ About!)

Jeff Armstrong of Armstrong Capital, your favorite Master Buyer, has been in the cash flow industry since 1991.  Specializing in the private mortgage note niche and seller financed notes he can be reached at 818-865-2322 or by email at For beginning to advance training opportunities, resources, to learn more or to obtain a quote visit and

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