Fraud in the real estate industry isn’t new, and it certainly isn’t rare. In fact, it’s alarmingly common. From developers siphoning investor money to falsified construction invoices and shady property management practices, real estate offers ample opportunity for financial deception. Why? Because there’s a lot of money at stake—and where there’s money, there’s motive.
Commercial real estate deals often involve large sums, multiple investors, and a web of moving parts. Without the right checks and balances, it becomes a prime environment for bad actors to manipulate the system. Understanding where fraud is most likely to happen is the first step in protecting yourself and your investments.
Below are four high-risk areas within the real estate industry. As you evaluate your own real estate ventures or those of your clients, keep these red flags in mind and consider what safeguards are in place—or should be.
1. Investor Fraud
This form of fraud typically involves a developer soliciting funds in exchange for an ownership stake in a property or LLC. The fraudster may exaggerate development plans, projected returns, or completion timelines to lure in investors. Once the funds are handed over, they’re often misused—or disappear entirely. Warning signs include repeated requests for more money, little visible progress on the project, and missed return expectations.
2. Real Estate Ponzi Schemes
Ponzi-style fraud arises when developers juggle multiple projects and use funds from one to pay debts or investors in another. This scheme can include co-mingling funds, inflating financials to satisfy lenders or investors, or outright theft. In extreme cases, money has been used to finance personal habits, such as gambling, then covered up with new investor capital. Without proper fund segregation and oversight, these schemes can continue unchecked for years.
3. Construction Phase Fraud
Fraud during the construction phase most often involves falsified or manipulated invoices. Common schemes include:
- Inflated labor/material costs – Contractors may overstate hours or prices.
- Fake budget changes – Unnecessary work is billed to pad profits.
- Wage fraud – Higher rates are charged than what workers are actually paid.
- Material substitution – Cheaper materials are used than what was promised, but the billing reflects premium quality.
These tactics not only drain funds but can also compromise the quality and safety of the final build.
4. Property Manager Fraud
Property managers often control rent collection, service providers, and bill payments—creating many avenues for fraud. Common schemes include:
- Disbursement fraud – Misusing bank account access for personal gain, then falsifying records.
- Kickbacks – Colluding with vendors to inflate costs and receive a cut.
- Co-mingling funds – Shifting money between multiple properties to mask theft or cover expenses.
- Rent skimming – Charging tenants more than the owner agreed to and pocketing the difference.
Without independent oversight, these schemes can go unnoticed for long periods.
Protecting Yourself Starts with Awareness
While fraud can never be entirely eliminated, having strong internal controls and regularly reviewing your processes can significantly reduce the risk. Whether you’re a developer, investor, or property owner, it’s important to know what to look for—and when to ask for help.
At The Bonadio Group, our team of fraud and real estate professionals can help you evaluate and strengthen your fraud prevention strategies. If you need further guidance or have any questions, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
