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Red Flag

DEFINITION

A marker or indicator of a potential problem or risk.

EXPLANATION

Awareness of red flags, or potential risk areas, is particularly important in the field of real estate due to the greater potential for loss and legal complications on all sides compared to many other transactions. Homebuyers, homeowners and real estate and mortgage professionals should all be knowledgeable about and alert for potential hazards, and exercise due diligence before proceeding with a transaction. Areas of concern include financial, real estate and mortgage fraud, as well as misleading listings and advertising.

Red Flags for Homebuyers

Signs that indicate a potential problem when buying a home include:

–             A sharp drop in the price of the property.

–             Indications of problem in the neighborhood, including multiple homes for sale, signs of neglect in surrounding homes, high crime rates or low school ranking.

–             Previous or pending lawsuits concerning the property.

–             Signs of neglect in home maintenance, often indicating greater or more serious neglect in areas that are not immediately apparent.

–             Characteristics that might affect later resale value, including psychological stigmas, such as a death or a crime that took place on the property, noisy and busy streets, nearby cemeteries, and more.

–             Signs attempting to camouflage problems in the property, including fresh paint applied only to one wall, potpourri masking offensive odors, locked or inaccessible rooms, hedges intended to hide a neighboring property, etc.

–             Properties requiring structural repairs, environmental clean-up, or zoning changes.

–             Problematic deeds, including liens and clouds on the title, which might cause future legal issues.

–             Missing photographs or no photographs at all in a listing.

–             Removal of structural walls or floors, or indication of foundation issues, such as sloping yards, large cracks or bulges.

Red Flags for Sellers

Signs that indicate a potential problem when selling a home include:

–             A buyer asking for too much assistance with closing, often indicating a problem with liquidity.

–             A buyer asking to slow down closing or speed it up beyond the usual timeframes in the region. Attempts to slow down closing may indicate problems with credit the buyer is attempting to resolve, while an attempt to speed it up may indicate a previous deal that has fallen through.

–             A buyer whose financial information does not indicate an ability to afford the purchase or repay a loan.

–             A buyer adding contingencies to a contract, often related to selling a different property.

–             A buyer who is prequalified but not preapproved. Prequalification letters are relatively easy to obtain, and do not usually involve much of a background check, while preapproval requires more screening and indicates a more serious intention to buy.

Red Flags Indicating Real Estate Fraud

Signs that indicate possible real estate fraud include:

–             Property that has increased sharply in value although no improvements (or insufficient improvements) have been made.

–             A property seller who is not the owner according to legal records.

–             A party who pressures others to act immediately, or not to consult anyone.

–             A demand to transfer a title or deed.

–             Identifying documents that appear altered or forged.

–             An appraisal based on comparable properties that are significantly different from the appraised property, outdated with no explanations, or located far away from the appraised property (except in rural areas).

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