Short Term Rentals Can Lead to Long Term Fraud

While STRs may be a lucrative opportunity for many, they are not without fraudsters targeting them as well.

Short term rentals (STR), such as those provided through online platforms Airbnb and Vrbo, might appear to be an easy way to make money or to find a cheap place to stay when out of town. However, what appears like a simple business model, in which one can rent out their homes or rooms, may not be so straightforward. 

One challenge in renting out property depends on where the owner lives, not only geographically, but also where the property is in conjunction to that residence. Many big cities, which see high tourism rates while simultaneously employing those in separate industries, impose restrictions on what is considered an STR and how long it may be rented. Additionally, many have ordinances stating property cannot be purchased simply to be used as an STR.

Another challenge of renting out property comes with the stress of success. If a property creates high demand, the effort to clean and represent the rental for new guests may be more time consuming than what an average person may be prepared for. Management companies may help solve the problem — or generate an entirely new problem.  

North Carolina fraudster Shawn Johnson stomped through all these puddles and more. Asheville is a quirky yet beautiful mountain town located in Western North Carolina with a leaf season which rivals that of the northeast, drawing tourists for the craft breweries and hippy culture. Here Johnson was born, and here Johnson defrauded the community. Federal courts found him guilty of counterfeiting in 2010, before he rehabilitated his image and earned the reputation as a hardworking handyman. That handiness helped pave the road into his real estate projects. Soon, he received a limited state real estate license and was flipping houses, brokering deals and managing STRs. 

However, by 2019, state real estate regulators stripped Johnson's license, stating he kept "at least" tens of thousands of dollars owed to STR owners. In 2022, he pleaded guilty to fraud, where Federal court documents cite that Johnson:

• Asserted homes would be primary residences when in fact they were intended to be used as STRs
• Lied about employment and falsified pay stubs to meet loan criteria
• Omitted information concerning lawsuits
• Produced fictitious rental agreements
• Failed to disclose the existence of other loans or financial obligations

From 2012 through 2019, Johnson and unnamed accomplices closed on 16 loans to purchase real estate, including a Veterans Administration loan that is only for primary residences. The loans totaled over $3.5 million. He currently awaits sentencing but could face up to 30 years in prison and a $1 million fine.

Were one to think about hiring a manager for their STR — since providing services such as cleaning, booking, insurance and paperwork might be more than the average person bargained for — several questions must be asked. The North Carolina Real Estate Commission Disciplinary Action bulletin provides guidance for those seeking to enter the world of STRs or possibly hiring a management company. The Commission permanently revoked Johnson’s real estate license for several reasons. First, Johnson did not have his management company properly licensed. Second, he provided services and accepted money without a contract. Third, he did not use trust accounts, which are designed to keep clients’ proceeds separate from the management companies. He accepted Airbnb deposits into his personal accounts. Then he never transferred the money to the owners at all. Finally, Johnson never applied for the permits for STRs to be used inside the city proper. 

A legitimate manager will have proper licensure and accounts, and they will know the process and be able to explain it satisfactorily. Licenses and permits can and should be checked before proceeding with any paperwork, which should be included in any arrangements in which money is involved. 

Johnson serves as a reminder to the importance of due diligence. Before hiring someone or approving a loan, it’s important to completely verify references and documentation. Fraudsters may commit loan falsification in many ways, such as:

• Altered bank statements
• Altered or fraudulent earnings documentation
• Fraudulent letters of credit
• Misrepresentation of employment
• Misrepresentation of loan purpose
• Altered credit scores
• False government identification numbers (such as a Social Security number)
• Failure to fully disclose borrower’s debts or assets
• Brokers using the identities of prior customers to obtain loans for customers unable to qualify

However, even when fraudsters do their best to scam, warning signs still exist. The following red flags might identify mortgage applications containing false or misleading information:

• An item other than cash is used for the down payment
• Borrower purchasing property from employer or landlord, having a non-purchasing spouse or purchasing an investment property without owning another current residence
• New home is too small for proposed occupants
• The only listing of employer’s address is a P.O. Box
• Borrower, who is purchasing private residence property, has an unreasonable commute from the subject property to their place of employment
• Borrower’s level of education or their age is inconsistent with the stated employment or the number of years employed
• Borrower is self-employed or their office phone number is the same as their home or personal mobile number
• When compared, borrower’s assets and liabilities are inconsistent
• Buyer/borrower is downgrading
• Loan application or appraisal is handwritten or incomplete

In the current roller-coaster real estate market, fraudsters may also try to run an air loan scheme — a loan for a nonexistent property, with “air” indicating the loan’s fraudulent absence of collateral. Fortunately, such schemes are often short-lived due to high chance of detection. Air loans require a high level of collusion, and perpetrators might even stage fake offices and people to participate. The loan documentation is needs to be fabricated throughout the process — from the borrower to the property ownership documents to the appraisal. Usually, air loans go into early payment default and, since there are no actual properties on which to foreclose, the losses on these loans can be enormous. 

While STRs may be a lucrative opportunity for many, they are not without fraudsters targeting them as well. A savvy investor must be thoughtful on each step, from property purchase to listing agent. Even the occasional renter should investigate current schemes in order to defend against possible scams. Agents often tell their customers there is “always another house” in the search to buy and, with STRs, there is also always another fraudster and scam.