How builders and developers can safeguard against real estate fraud. By Tim Ball and Nancy Cox
In today’s real estate market, especially within the residential development and home-building sectors, the stakes are rising. As projects grow in scale, capital inflows intensify, and timelines tighten, the industry becomes an increasingly fertile ground for financial deception and misconduct. What many in the sector may underestimate is how real estate fraud can quietly erode margins, damage reputations, and disrupt entire projects.
Those who work on fraud risk assessments and forensic investigations in real estate know that successful fraud is rarely a one-time act. It is usually enabled by systemic weaknesses. To protect your firm and your investors, lenders, and buyers, you must understand not only where fraud is most likely to occur, but also the checks and practices that can prevent it.
Where fraud tends to emerge
Fraud in real estate can occur in every phase of a project’s lifecycle. During capital solicitation, for instance, bad actors may raise funds by promising ownership interests or outsized returns, only to misdirect the capital or use it opportunistically to finance unrelated ventures. Warning signs include aggressive fundraising without transparent documentation, repeated demands for more capital with little justification, or ongoing delays that are explained away with overly optimistic assurances. Builders and developers that find themselves raising capital or working with outside partners should insist on audited reporting and independent oversight of disbursements.
Another area of concern arises when funds from one project are used to prop up another. This co-mingling of funds is sometimes disguised as efficient cash management, but it becomes outright fraud when it is designed to hide underperformance or cover shortfalls. Maintaining separate accounts for every project and requiring justification for any transfers helps prevent this practice from taking root.
Construction-phase risks
Once construction begins, the opportunities for manipulation multiply. Inflated labor and material costs, questionable change orders, wage fraud, and material substitution are all common schemes. Contractors may bill for more hours than worked, create unnecessary change orders to inflate revenues, or use cheaper materials while charging for premium products. These practices not only drain resources but also jeopardize the quality of the build and increase liability. Strong invoice review processes, vendor audits, and periodic site inspections are effective ways to catch inconsistencies. Clear contract terms that require lien waivers, certified payrolls, or independent validation of change orders can further discourage fraud at this stage.
Fraud during ongoing operations
Fraud does not disappear once the building is complete. During ongoing operations, property managers may skim rent payments, collude with vendors to inflate maintenance costs, misuse their disbursement authority, or co-mingle funds across properties. Without independent oversight, such as periodic reconciliations, surprise audits, and transparent vendor bidding, these activities can continue undetected for years, quietly eroding the financial health of a property.
Building strong defenses
While no organization can eliminate fraud risk entirely, a thoughtful and layered control environment greatly reduces the likelihood of problems. One of the most important practices is separating financial duties so no single person controls the entire chain of fundraising, accounting, and payments. Checks and balances are essential, even for firms with modest staff sizes.
Oversight should also extend to governance. Developers who raise outside capital should consider creating independent boards or advisory committees with financial expertise, along with regular reporting and audits. Due diligence is equally critical when working with vendors and subcontractors. Thorough background checks, reference verification, and careful monitoring for red flags, such as frequent switching of subcontractors or unexplained markups, should be part of the onboarding process. Requiring lien waivers, proof of insurance, and bonding provides added protection.
Modern accounting platforms also make it easier to monitor expenses through data analytics. Trends, variances, and anomalies can be flagged quickly, allowing organizations to investigate unusual activity before it spirals. Surprise audits and reconciliations are another powerful deterrent. Random reviews of petty cash, bank accounts, invoice approvals, or warehouse inventories send a clear message that no one is exempt from oversight.
Equally important is creating a culture of integrity. Employees and subcontractors often notice irregularities before outsiders do. When they feel safe to report concerns, whether through anonymous hotlines or direct communication, they become an invaluable early-warning system. Building a culture where transparency and accountability are non-negotiable makes fraud much harder to conceal.
Why vigilance matters
The cost of inaction is steep. A failed project can lead to far more than financial loss. It damages stakeholder trust, tarnishes reputations, invites regulatory scrutiny, and can jeopardize future financing. Even small residential projects are not immune. Oversight gaps and layers of subcontracting can provide ample opportunity for misconduct if controls are not in place.
The strongest builders and developers are those who prepare for the possibility of fraud rather than assuming it could never happen to them. Designing organizations where fraud has no place to hide is an investment in the long-term success of every project. Vigilance does not mean paranoia; it means building with accountability, clarity, and trust as firmly as you lay foundations.
Tim Ball is Partner at The Bonadio Group and Nancy Cox is Industry Leader, Construction & Real Estate. The Bonadio Group is a nationally ranked IPA Top 40 CPA firm providing assurance, tax, and advisory and consulting services to clients both within and outside of the US. The firm maintains several offices across the country, with team members operating globally. Its expert team of industry-leading professionals serve as trusted advisors to clients of all sizes, helping businesses and organizations reach their short- and long-term goals.