Cypto creates new risks for property rental businesses

The crypto craze has arrived in real estate. 

Look no further than Manhattan. Celebrity brokers like Ryan Serhant are courting crypto whales, usually nouveau riche investors in their 20s, to buy the city’s most expensive listings, according to the New York Post. 

In Miami, at the high-end address of Arte Surfside, home to Ivanka Trump and Jared Kushner, the 5,000 square foot Penthouse Unit B recently sold for $22.5 million in crypto. 

Single-family homes are also in the mix. Buyers hustling to stay ahead of rapidly increasing home prices have purloined their even bigger crypto gains into houses and rental properties. 

In the apartment sector, where rents have been rapidly increasing, some apps already allow residents to pay with crypto. Tenants of L.A. developer Rick Caruso’s properties can now pay rent in bitcoin. Caruso told the Los Angeles Times his crypto program holds particular appeal to younger renters. 

These examples of crypto’s rise in real estate are still the exception, rather than the rule, for how deals are getting done. But they also highlight the increased legitimacy of digital currencies in the marketplace today. For apartment professionals, crypto’s rising mainstream acceptance presents both new opportunities and risks. 

Crypto’s illicit shadow

While governments and legitimate crypto exchanges have made progress in curtailing criminal use of cybercurrency, the nature of digital transactions means it will probably never be eliminated. 

Investigators have consistently focused on bitcoin payments to rioters preceding the Jan. 6, 2021 attack on the Capitol. New evidence also suggests Russian oligarchs have used crypto to shield their assets from international sanctions levied after the invasion of Ukraine. 

The technology is also prone to hacks. According to recent findings by cybersecurity firm Atlas VPN, blockchain hackers stole $1.3 billion in 78 hack events in the first quarter of 2022, an all-time high. The recent Axie Infinity video game hack, where as much as $625 million was stolen, made it one of the largest single crypto-thefts to date.  

Know your customer (KYC) rules, which require crypto exchanges to conduct identity checks on new clients, have made anonymity on legitimate exchanges more difficult. But KYC is only effective if the identity used to open an account is real. An investigation by crypto news site CoinDesk found that, for as little as $200, a sophisticated fake ID — openly available for purchase online — could get you trading bitcoin under an assumed identity on bonafide sites like Coinbase and Binance with relative ease. 

What crypto’s rise means for real estate

For property rental professionals, this landscape demands a new approach. Operators need to adapt to a new way of transacting to respond to customers’ preferences for digital currencies while guarding against fraudulent activity that uses crypto as a shield. 

For instance, fake documents in the form of pay stubs and bank statements — crucial for income verification — have long been a scourge of the lease application process. They’re widely offered for purchase online under the guise of “novelties” that aren’t intended for actual use, a tactic that shifts responsibility for any illegal activity to the buyer.

The new wrinkle with crypto is that these fake document vendors are now offering their wares in exchange for bitcoin, and they’re not concerned if the digital currency they collect comes from a legitimately opened account. 

One such vendor that claims to be based in New York currently accepts bitcoin as its only form of payment. It eschews the legally messy and traceable route of credit or debit card payments — which would necessarily pass through the established U.S. banking system — “due to data protection and customer privacy reasons,” according to its FAQ page.  

The site’s offerings include fake paystubs and bank statements. And its sample documents use logos from Bank of America, Chase, TD Bank, and Wells Fargo. Utility bills, which are often used to verify a previous address, are available with Verizon’s logo. Even completed, fake U.S. tax returns are up for sale. 

Policing fakes and frauds

In this environment, leasing agents now face the same hurdles as law enforcement officials trying to police these activities. 

Namely, while these scams are widely available using fiat currency, crypto provides yet another layer of secrecy for leasing application fraudsters to hide behind. 

What are operators to do? The key, of course, is to not let them through in the first place. 

Using tech can help. AI tools are available to scan the computer code inside PDF documents to determine if they have been altered. 

But the low-tech approach of good property management basics is just as important. 

• Require at least two months of paystubs or bank statements for a lease application. Legitimate applicants won’t blink, but fraudsters will be forced to produce more fakes and potentially more easily spotted mistakes.

• Look for variable dates when a paystub was issued and when the deposit hit the applicant’s account. Weekends and holidays can shift deposits by a day or two, but longer lags are rare. This is an area where fraudsters get sloppy.

• Pick up the phone. Call employers at a number listed on their website — versus what applicants provide — to confirm employment. Some firms won’t reply, but many will, especially if you ask applicants to give HR a head’s up that you’ll be calling.

• Incentivize your team to critically vet applications by tying bonuses to a property’s on-time rent payments, not just new leases.

Crypto’s rising legitimacy in real estate doesn’t have to be bad, and operators can benefit. But the increased layers of deception in the leasing application process mean they also need to proceed with extra caution. 

Daniel Berlind is CEO of Snappt  and President of Berlind Properties.