[War Against Jeonse Fraud] Malicious Landlord Disappears After 100 Billion Won Worth of Empty Jeonse Contracts... Various Cases of Jeonse Fraud

Immediately after signing the lease contract

Immediate sale to a third party, etc.

Ministry of Land, Infrastructure and Transport shares

over 13,000 suspected jeonse fraud cases with the National Police Agency

Among HUG’s focused management debtors,

over 2,000 cases referred for investigation

[Asia Economy Reporters Kim Min-young, Jo Seong-pil] ‘Immediately selling to a third party right after signing the lease contract’ ‘Malicious debtors borrowing names to bring in tenants and then absconding with the deposit.’

These are examples of suspected jeonse fraud cases disclosed by the Ministry of Land, Infrastructure and Transport (MOLIT) on the 24th. To conduct a special crackdown on jeonse fraud, MOLIT jointly analyzed these cases with the Housing and Urban Guarantee Corporation (HUG) and the Korea Real Estate Board and shared the information with the National Police Agency. This information sharing is part of the joint special crackdown on jeonse fraud that began at the end of July. The police received 13,961 pieces of suspected jeonse fraud information from MOLIT.

In particular, among 3,353 focused management debtor cases where HUG had made subrogated payments of deposits to tenants but the debts remained unpaid for a long time, 2,111 cases were referred for investigation. There are 26 landlords involved, and the amount of subrogated payments reaches 450.7 billion KRW. Additionally, the police received over 10,230 pieces of related information secured through their own real transaction analysis, including cases of mass buying and selling immediately after lease contracts and multi-home contracts with jeonse rates exceeding 100%. The National Police Agency plans to accelerate the handling of existing cases and initiate investigations into new cases with this data sharing.

A representative example of jeonse fraud analyzed by MOLIT is the immediate sale to a third party after signing the lease contract. According to MOLIT, landlord A colluded with a licensed real estate agent to sign about 1,000 billion KRW worth of “empty jeonse” lease contracts with approximately 500 people. Afterwards, A sold the house to insolvent landlord B and disappeared. When a landlord responsible for returning the deposit is insolvent, meaning their debts exceed their assets, institutions like HUG are less likely to recover the funds from the landlord. This means that the tenant’s deposit paid by HUG on behalf of the landlord cannot be reimbursed.

Another method used in jeonse fraud is rolling over deposits through name transfers. Landlord C, a malicious debtor banned from HUG guarantee enrollment, found it difficult to recruit tenants and sold the house to acquaintance D. The lease contract was signed under D’s name, and the collected deposits were not returned to the tenants.

Landlords violating the mandatory guarantee subscription obligation were also caught. Multi-home landlord E Corporation rents out about 200 houses but did not subscribe to guarantee insurance, resulting in a fine of about 30 million KRW from the government. This violated the mandatory guarantee subscription obligation under the “Private Rental Special Act.”

There was also a case where a landlord F, who owned an entire apartment building, concealed the fact that a mortgage loan was overdue and that the bank had warned of an impending auction. However, F colluded with a licensed real estate agent to hide this fact and signed lease contracts with about 30 tenants, defrauding their deposits.

The problem is that the recent decline in housing prices increases the likelihood of “empty houses” where the jeonse price exceeds the house price. Due to the base interest rate hikes and concerns over a global economic downturn, buying demand has weakened, causing a housing market slump. Since the implementation of the Lease Protection Act, jeonse prices have risen significantly, but with the recent downward trend in house prices, the risk of jeonse deposits being at or above the sale price is increasing.

If there is no difference between the sale price and the jeonse price, there is a high possibility that tenants will not be able to recover their deposits at the end of the lease contract due to deposits exceeding the house price, resulting in “empty jeonse.” According to the real estate platform Dabang, among 3,858 new villa jeonse transactions in Seoul in the first half of this year, 815 cases (21.1%) had a jeonse rate exceeding 90%. Among these, 593 cases had jeonse prices equal to or higher than the sale price.

Yoon Ji-hae, senior researcher at Real Estate R114, advised, “To avoid malicious tenants who deliberately commit fraud, do not sign contracts for jeonse properties where the deposit is set higher than the sale price or market jeonse price. Properties with senior secured claims carry a high risk of deposit return, so it is better to sign monthly rent contracts rather than jeonse.”

As malicious landlords increasingly use various methods to commit jeonse fraud, the government plans to announce measures to prevent jeonse fraud next month. Possible measures include mandating landlords to attach tax payment certificates when signing lease contracts or verifying tax delinquency through licensed real estate agents. This is because the scale of tenants unable to recover deposits due to landlords not paying taxes is increasing. According to data from the Korea Asset Management Corporation (KAMCO) on “Uncollected tenant deposits due to tax delinquency public auctions,” from January to July this year, the amount of deposits tenants could not recover due to landlords’ tax delinquency (number of cases) was 12.216 billion KRW (101 cases), more than double the 5.25 billion KRW recorded in 2017.