Many of South Koreans aspire to own a home. Rental deposits, often seen as a precursor to property ownership, have become a popular choice among individuals aiming to make progress toward this goal. However, a significant number of individuals in their 20s and 30s fall victim to rental deposit fraud. According to data presented by the Ministry of Land, Infrastructure and Transport to the National Assembly on the progress of the ”Special Law on Support for Rental Deposit Fraud Victims and Housing Stability,” 72% of the victims are in their 20s and 30s.
What is Rental Deposit Fraud?
A rental deposit involves placing a portion of the housing price as a deposit, which is refunded when the lease period expires. Through this system, tenants can acquire interest-free rental deposits to buy a house, while landlords can reduce housing expenses for tenants. Rental deposit fraud occurs when tenants, who have entered into a rental agreement, are unable to recover their deposit from landlords.
Reasons for the Increase in Rental Deposit Fraud:
Since 2020, regulations, such as the Renewal Request Right for Corporate Lease Contracts and the Monthly Rent Cap, have been in effect. While these measures may seem beneficial for tenants, the introduction of these regulations led to a decrease in available rental properties, exacerbating the shortage of rental properties. Due to the rental property shortage, rental prices surged until the end of 2021, leading to an increase in fraudulent schemes that take advantage of the urgency among the younger generation.
Common Methods of Rental Deposit Fraud:
Dummy rental deposit fraud involves acquiring houses with rental prices that are close to the purchase price for landlords lacking in financial resources, engaging in a speculative investment known as ”gap speculation.” In this scheme, landlords use the tenant‘s rental deposit and bank loans to cover the purchase price of a house, leaving little financial flexibility. If such houses go into auction, tenants may lose their deposit. Additionally, if the next tenant cannot be found or if the house‘s price falls below the rental deposit, a chain of deposit return incidents may occur.
Rental deposit fraud can also occur while drafting the rental agreement. Some certified real estate agents or brokers may engage in fraudulent activities by entering into a monthly lease agreement with the landlord and a rental agreement with the tenant, diverting the rental deposit in the process. Fraudulent practices may also include individuals other than the landlord forging a fake rental agreement by using the landlord‘s identity or using a forged power of attorney to act as the landlord‘s representative and seize the deposit.
A case of rental deposit fraud in 2022 involved a landlord exploiting lower land prices to target the younger generation. The landlord, Mr. A, owned over 2,700 houses. As he faced financial difficulties, he auctioned off some of the buildings. Subsequently, Mr. A, through transactions with certified real estate agents, introduced prospective tenants to the availability of the houses, claiming they were not subject to auction, and then entered into rental agreements. Once the auction was completed, victims were unable to recover their deposit because the money went first to the bank that provided Mr. A‘s loan and the auction institution. Despite the existence of the ”priority repayment” system to allow partial repayment of the deposit to small tenants before other claims, Mr. A exceeded the limit of priority repayment due to the high deposit amount, leaving rental deposit fraud victims unable to recover anything.
What is the Government Doing About This?
To prevent rental deposit fraud, the Ministry of Land, Infrastructure and Transport announced that the National Assembly has passed the ”Special Law on Support for Rental Deposit Fraud Victims and Housing Stability.” This law aims to expand support for victims and increase the rental deposit threshold to 500 million KRW. Even tenants who do not incur significant losses in rental deposit amounts can now be recognized as victims. Additionally, the law includes situations where the landlord declares bankruptcy or restructuring, expanding coverage beyond just the start of auction proceedings. As a support measure, the government has committed to providing interestfree loans for up to 10 years to victims who cannot receive the priority repayment amount at the time of the auction‘s completion.
However, there has been criticism that the law fails to consider the perspective of the victims adequately. Critics argue that since victims are already burdened with significant loan obligations, providing support in the form of priority repayment would be more effective. Moreover, the law excludes the previously requested “preemptive repayment and subsequent recovery” method from the agreement. This method involves public agencies purchasing the rights to the repayment of the tenant‘s deposit at a discounted price, compensating the tenant first, and later recovering the costs through auction or other means. Concerns persist that the law still restricts the scope of rental deposit fraud victims, potentially resulting in insufficient compensation.
How can Rental Fraud be Prevented:
Rental deposit fraud is prevalent among young people because of their lack of experience and knowledge in real estate transactions. Therefore, offering general education courses on real estate at universities could help reduce the number of young victims. In a survey conducted among Soongsilians regarding real estate-related courses, 77.8% expressed a desire for such courses, with 11.1% indicating a strong desire, and 11.1% indifferent to whether such courses are offered or not. Additionally, when asked about the main reasons for the majority composition of rental deposit fraud victims being in their 20s and 30s, respondents cited a lack of knowledge and experience in understanding real estate contracts.
Jo Hee (ST Cub-Reporter)
joheesoongsil@soongsil.ac.kr
