What is Constructive Fraud in Real Estate?

Any time there’s a lot of money involved in a transaction, there’s a risk of fraud. So it stands to reason that fraud is a major issue that affects the real estate industry. There are a few types of fraud in this field, but one that many people aren’t familiar with is constructive fraud. With this type of fraud, the person committing it gains an unfair advantage over someone else by lying or leaving out details. Even if this wasn’t intentional, it’s possible to be charged with constructive fraud. If you’re a real estate professional, you need to know how this type of fraud is defined, how it differs from other types of fraud, and how to avoid this issue altogether.

Legal Definition of Constructive Fraud

In general, constructive fraud happens when you either lie or omit important information when talking to someone who trusts you due to your fiduciary relationship —and you gain an advantage as a result. In real estate, a fiduciary relationship exists between a real estate agent or broker and a client. So if you lie or leave out information when talking to your client—and you make a profit after doing so—you might be guilty of constructive fraud.

 

Note that you do not have to intentionally lie in order to be guilty of this charge. In fact, there’s no need to prove intent with this type of fraud, which means it’s often easier to be charged with this than other types of fraud in real estate. This is why you have to be especially careful about what you tell clients as a real estate professional, since simply claiming to know a fact when you’re not sure can land you in legal trouble.

Keep in mind that it’s necessary to prove a few elements in order to charge someone with constructive fraud. First, it must be proved that you have a fiduciary relationship in which the person you supposedly defrauded was expected to trust you. If you agreed to represent a client as their real estate agent, you have a fiduciary relationship according to the law.

The person accusing you of constructive fraud also must show that you lied or omitted information—and that he or she was hurt as a result, such as by losing money. Finally, he or she has to prove that you benefitted from your dishonesty. For instance, if you got a commission on a house that the buyer never would have purchased if you’d been honest, you could be guilty of constructive fraud in real estate.

Examples of Constructive Fraud in Real Estate

Constructive fraud can occur in any industry. But in real estate specifically, there are some situations that you might find yourself in where you could unintentionally commit constructive fraud if you’re not careful. One example is if you insist to your clients that the house they’re considering buying has everything they’re looking for—when you actually have no idea what features they want and didn’t bother to ask before reassuring them. In such a case, there’s likely no ill intent, but you could end up profiting off a transaction that actually hurts the client in the end due to you not doing more research.

Another example of constructive fraud in real estate is if your clients want to subdivide the property they’re buying, and you tell them they can do that—without first confirming that the city will allow it. Similarly, if you know your clients want to buy a house specifically to rent out and generate income, and you tell them they can make a lot more in rent than they really can, you could be guilty of constructive fraud.

Finally, if you’re a real estate agent who is showing a home to potential buyers, and they ask about the plumbing system, you could be committing fraud if you tell them it’s in great condition when you actually don’t know. If it turns out it needs major repairs or replacement, and it’s not discovered until after closing day, the buyers could accuse you of constructive fraud. And of course, if you do know the plumbing system is not in good condition—and you claim it is—that’s also fraud.

Constructive Fraud vs Actual Fraud

Now that you have some examples of what constitutes constructive fraud in real estate, it may be helpful to know how this type of fraud differs from other types. Basically, there are two main types of fraud: actual fraud and constructive fraud. You know what constructive fraud is now, but what is actual fraud?

Put simply, actual fraud is intentional concealment or misrepresentation of the facts. So, unlike with constructive fraud, there has to be intent to lie in order to be charged with actual fraud. There are a few types of actual fraud that you might see in real estate. One is intentional misrepresentation, such as when a real estate broker does not believe that a statement is true but claims that it is—to the detriment of the client.

Another type of actual fraud is negligent misrepresentation, where the agent says something is true but does not have enough information to back it up. For example, the agent could state that the house is much bigger than it actually is, as he or she failed to double-check the square footage before assuring buyers about the size.

Promissory fraud involves making a promise and then not following through. So a real estate agent could promise to help find renters for an investment property if the buyers purchase it—when he or she never intended to follow through with this offer to help. Finally, concealment occurs when an agent purposely hides a flaw in the property in order to sell it—knowing it wouldn’t sell if he or she were honest about it.

Even if you’re not guilty of any of these types of actual fraud because the intent wasn’t there, you could still be charged with constructive fraud if you misled or omitted critical information to clients. This is why it’s so important to be aware of what’s defined as fraud in real estate.

How to Avoid Constructive Fraud

If there’s evidence you committed constructive fraud, you could face major fines and other serious consequences. That’s why it’s important to avoid it at all costs as a real estate professional.

The best way to do so is to make sure any statements you make to your clients are factual. Rather than simply guessing or making assumptions, let your clients know you don’t know the information yet and will get back to them with it once you check the facts. And of course, don’t leave out any important information that clients should know before buying or selling a house. After all, as you can see, you can be accused of constructive fraud even if you did not intend to lie or mislead.

Fraud of any kind is a big issue in real estate, and it’s important to do everything possible to avoid it. We’ve found one of the best ways to avoid fraud in this industry is to use an ACH electronic money transfer system instead of wire transfers or cashier’s checks for transactions. This is because ACH systems like paymints.io use numerous safety features, from encryption and identity protection to real-time tracking for transactions in real estate. To learn more about how paymints.io can keep buyers and sellers safe, schedule a demo with us today!

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