A few years ago, the reputations of some of the world’s most prestigious universities came under serious question when the U.S. Department of Justice charged dozens of super-wealthy and, in some cases, famous parents of college applicants for bribing university athletic coaches to write phony letters supporting their kids’ applications.
These letters carried significant weight in admissions decisions, often tipping the scales significantly in the athlete’s favor. The problem was the coaches were on the take. Their letters were fiction, but they did the trick.
The entire scam went through a single conduit who collected money from the parent and paid off the coaches for their support, aware that admissions officers have little time for due diligence on their admittances.
Something similar has been happening in multifamily real estate. But unlike the college admissions scandal which impacted relatively few people—appalling as it may have been— insider fraud in multifamily housing is a cancer to both deserving renters and to operator cash-flow and profitability.
Ultimately, it results in distorted submarket dynamics, such as higher rents due to an epidemic of deadbeat residents approved under false pretenses.
Multifamily insider trading
In one common form of insider fraud, a leasing agent will vouch for an applicant with no verifiable income source. Let’s say an operator wisely requires bank statements to augment paystubs in scoring applicants’ financial health.
The operator only accepts documentation from approved financial institutions or payroll companies and the system they use for scraping and processing data automatically rejects documents submitted by non-approved third parties, such as leasing agents.
When support documents are rejected for this reason, a leasing agent with the operator will often call whoever is responsible for stewarding documents, claiming they personally submitted the rejected document on behalf of the applicant while persistently and aggressively pushing the operator to accept the applicant’s bogus forms.
Attempting to convince the system administrator to manually upload a phony bank statement, the agent might even send a fraudulent CPA letter bearing a notary seal and confirming the applicant’s self-employment. We suspect these agents, who survive on commission and are under perpetual pressure to lease units, are working with organized crime to produce this fake “self-employment” documentation.
In one instance, one of our clients noticed an uptick in “self-employment” delinquencies in a specific region. They decided to halt manual document uploads from this region. When delinquencies didn’t go down, it became clear the problem wasn’t the uploading of self-employment documents in principle, but rather the phony documents themselves.
In another case, a client fired 14 agents in a single day after we discovered a pattern of insider fraud. Individuals who violate laws out of desperation are often sloppy.
So if the same CPA letter, with a copied and pasted notary and signature, comes to us multiple times for different applicants (and the stated income is beyond ridiculous), it’s a red flag that fraud may be rampant among an operator’s team of agents within a region.
Whether the leasing team is internal or employed by a property management firm, delinquencies will remain an acute challenge at the property until the operator takes steps to remediate. One way to reduce or eliminate fraud is to provide meaningful financial incentives to agents who build a track record of leasing to good residents.
Incentivize beneficial behavior
In a perverse way, agents are incentivized to do the opposite: lease to questionable residents because evictions mean the same unit can be fraudulently re-leased immediately, therefore providing multiple bites of the same apple.
Firing is obviously necessary when an employee or vendor commits fraud. But terminating employment only addresses the symptom, not the root cause.
While commission-only comp plans can be a pressure point for agents, they aren’t the only issue. Income-to-rent ratios can also tempt agents toward fraud. Every property and every submarket feature different sets of dynamics that inform mandated ratios.
Ratios are necessary for risk management, but savvy operators are leveraging comprehensive and real-time property, market, and economic data to optimize their ratio mandates. By leaning into data analytics, they manage risk and empower their agents as much as they can.
Accommodating complexity
In the coming years, self-employment and gig-work will account for increasing portions of applicant incomes. There are also applicants who have financial resources that aren’t revealed through paystubs.
Only by analyzing the data can an operator effectively balance risk and velocity.
An AI-powered platform that pulls data from legitimate bank statements offers a holistic picture of an applicant’s financial strength and accountability in ways that were impossible just a few years ago. But any AI-based platform used for income verification should follow a strict set of rules about where documentation can come from and the circumstances under which an administrator can manually upload a file.
This set of adhered-to document parameters, or standards, ensures that an operator is working with proper data. These parameters can also play a natural, spider-web-like role in detecting fraud. When leasing agents reach out with a request to manually upload documents rejected by the platform because they didn’t come from an approved institution’s IP address, it’s an opportunity to ask some key questions.
Often, the agent is acting in good faith and has an applicant who really is self-employed and financially responsible… but not always.
Whether the request is legitimate will become known through reviewing the documents and looking out for larger patterns simultaneously.
The bigger the portfolio, the more risk there is for insider fraud. If your verification partner has strict document guidelines and detects a pattern of fraud in your portfolio, it is critical to get ahead of it to determine the best course for investigation and, if necessary, disciplinary action.
In multifamily housing, the stakes aren’t merely whether a 17-year-old gets into Stanford.
Insider fraud in this game could negatively affect investment funds, pension accounts, 401Ks, employee livelihoods, access to capital and even personal safety for residents. Thankfully, with today’s technology and common-sense policies, fraud in our industry is not a fait-accompli.
