Fraud in Commercial Real Estate Transactions: How Buyers and Sellers Can Identify Red Flags

Commercial real estate transactions are known for being complicated. While most deals proceed without issue, fraud remains a real risk, even in situations where you are completely comfortable with the other party.

In Georgia, fraud claims in real estate transactions can involve issues like misrepresentation or the concealment of material facts. Below, our experienced attorneys outline the red flags that both buyers and sellers should be aware of when entering into these transactions.

Red Flags for Buyers

Buyers in commercial transactions often rely on representations made by other parties, which leaves them at risk of fraud. Some things to watch out for include:

Inconsistent or Incomplete Financial Records

If the seller provides financial statements that do not align with tax returns, then that inconsistency should raise immediate concerns. This also applies if documents are missing or if you receive duplicate copies of the same paperwork.

Undisclosed Property Defects

Some defects are obvious during inspection, while others might not be immediately obvious. It’s not automatically a red flag to discover a defect that wasn’t disclosed, but watch for signs that the seller was aware of the issue and tried to cover it up.

Pressure to Close Quickly

Unusual urgency can be a warning sign. While some transactions are legitimately time-sensitive, excessive pressure to waive due diligence periods or skip standard review processes often benefits the seller more than the buyer. The more pressure there is to rush the closing, the higher the chance that something is wrong.

Title Irregularities

Another red flag to look out for is problems with the title. When there are unresolved liens or discrepancies in the chain of title, issues that lie beneath the surface can be serious. An advantage of hiring an attorney is that they can perform a title search and review the documents for signs of fraud.

Misrepresentation of Zoning or Use Rights

Buyers sometimes assume that a property can be used for a particular purpose based on current operations or informal statements. However, zoning restrictions, permitting requirements, or prior nonconforming uses may limit what is legally allowed.

Red Flags for Sellers

Sellers face their own risks in commercial transactions. The best way to avoid getting into a fraudulent transaction is by carefully reviewing the following signs:

Questionable Proof of Funds

A buyer’s ability to afford the purchase is at the heart of every transaction. If the proof of funds is outdated or the documents seem “off,” then you could benefit from asking for additional proof of funds.

Unusual Contract Modifications

Late-stage changes to key contract terms may be a sign of potential fraud. You should pay special attention to the major terms, including price changes or the addition of unexpected contingencies.

Use of Unverified Intermediaries

Transactions involving unfamiliar brokers can also introduce unnecessary risk. If a party claims to act on behalf of a buyer or entity but cannot prove they have the power to do so, then it’s important to take a step back and evaluate if you’re being manipulated.

Delays Paired with New Demands

While some delays are expected, repeated extensions combined with new demands can indicate bad faith. A buyer may attempt to prolong the process while seeking concessions that were not part of the original deal.

Requests to Bypass Standard Procedures

Requests to move funds outside established escrow processes or to alter closing procedures should be treated with caution. Deviating from standard protocols increases the risk of fraud and financial loss.

Talk to Poole Huffman Right Away

Fraud in commercial real estate transactions rarely appears as an obvious scheme. More often, it develops through small inconsistencies or issues that snowball into something larger. While you can’t control what other people do, there are things you can watch out for that may help you identify fraud early in the transaction.

These efforts are important for buyers and sellers alike. At Poole Huffman, our attorneys are ready to help you pursue a transaction while also working to shield you from the risk of fraud. Instead of trying to handle such a big transaction on your own, reach out to our firm today for a private consultation.