In February 2023, a victim of a rental housing fraud in his 30s committed suicide at a villa in Michuhol-gu, Incheon. A suicide note was found at his home, calling for measures for the victims of rental scams. The person had signed a rental contract with a deposit of 70 million won in 2021. However, the deposit was not returned as the house was auctioned off. Under the Housing Lease Protection Act, tenants who are protected by the top priority right to compensation will receive their deposits back if the house is sold off in an auction. 

However, this was not the case with the victim. Other victims of housing frauds either did not receive a reimbursement or their homes were auctioned off. Three victims of the “architecture king,” the swindler landlord who builds buildings and uses the loans and deposits for other buildings, killed themselves in a row, and more than 1,800 people were reported as victims of rental scams. The root of this crisis is the traditional rental payment method called jeonse.

What is Jeonse?

Jeonse is a unique long-term deposit rental system in Korea. It refers to the process of entrusting a certain amount of money to the owner of a real estate and renting the property for a specified period of time. When tenants move out of the real estate, they receive the full amount of money they have deposited. As monthly rent payments are more common than yearly payments worldwide, the jeonse system, where people pay larger amounts of money usually for two years at once, is considered unique. 

How do the Housing Rental Scams Work?

The fraudsters often deliberately target villas, units of a multicomplex house, which have been a housing option for the less affluent in Korea. Unlike apartments, villas have opaque market prices that often show the same rental fee and house prices. Newly-built villas have low cashability and investment value but good convenience of living as apartments, which leads to the high demand for jeonse. Using this advantage, fraudsters mass-produce victims by purchasing hundreds and thousands of rental units without a penny. 

The houses targeted in the rental scams are often kkangtong jeonse (a house where the sum of the deposit and the homeowner’s mortgage is higher than the sale price, in English). In particular, the risk increases when housing prices oscillate. Incheon is a place where such a surge in housing prices has been taking place.

In most cases, the swindlers have no intention of returning the deposit in the first place. They indiscriminately purchase houses and collect unfair property benefits such as commissions and rebates. They also buy lands and build villas and apartments under the name of real estate agents and brokerage assistants. Once complete, a contract is immediately signed with tenants. When the rental contract expires and the deposit must be returned, a new tenant is brought into the picture, whose deposit is used to pay the existing outgoing tenant. 

The fraudsters continue with endless investments by buying or building another property with funds secured from previous purchases. They usually follow the “simultaneous progress” method of signing a rental contract with a tenant at a price same as or higher than the sale price, while purchasing other housings with deposits made by tenants. In this way, the swindlers can buy houses indefinitely with no or small bit of money out of their pockets.

House rental fraud is a vicious and thoroughly organized crime committed against tenants and landlords. One such method even involves criminal organizations taking advantage of both the owner and the tenant. The swindlers benefit from simultaneously using a houseowner, who worries about his or her not being sold and the tenant who cannot afford living in an apartment due to insufficient budget. 

In addition, the frauds are usually carried about by promoting rental sales online or through real estate at a price much lower than others. Rental scams attract more potential tenants by offering a deposit lower than the average. If someone shows interest in a property, the swindlers show the house and a sale, and eventually get a cash deposit. Sometimes they provide forged agreements or receipts for contracts for legitimacy. 

Most of the victims of house rental scams are young people with little social experience. According to the Ministry of Land, Infrastructure and Transport, victims in their 20s and 30s account for 70 percent of all rental frauds. Owing to soaring prices and the burden of monthly rent and rising management costs, college students prefer jeonse.

Young people in their 20s and 30s are vulnerable to rental frauds because they have relatively little experience in real estate contracts, making them preferred targets preferred targets of the scams. Fraudulent organizations make proposals to young people who seem unable to afford the necessary funds. Police investigations have found that some suspects pretended to be doing favors and provoked young people to sign rental contracts by offering conditions such as “special interest support for young people” and “reducing deposits for single-person households.” 

They are particularly defenseless against rental frauds due to the asymmetry of information and the unethical acts of appraisers and licensed real estate agents. Thus, the younger generation has recently started opting for monthly rent instead as they are anxious that the jeonse funds might be siphoned off through fraudulence. Moreover, the proportion of apartment purchases has increased as villas are common targets of rental frauds.

Tenants rely heavily on licensed real estate agents in the process of signing a lease contract. It is difficult for younger tenants to know the risks underlying signing contracts as even real estate agents are systematically part of the housing scams. The UOS Times interviewed a rental-business owner about the method and structure of housing contracts in Korea. 

Q1. What do you think about the housing rental frauds in Korea?

A1. I have heard that jeonse frauds and monthly rent frauds are prevalent these days. First, I think it is very mean to cheat as this type of fraud usually targets the younger generation, who usually does not have expertise. Moreover, finding a house in Korea is a matter of great importance as it costs a large amount of money.

Q2. Recently, there have been cases where even real estate agents are systematically involved in housing scams. How much do you think owners and tenants rely on a licensed real estate agent in the process of signing a contract? 

A2. From the owner’s point of view, the degree of reliance on a real estate agent is not as much as that of a tenant, though it is still quite high. Basically, landlords notify the real estate agent of the desired monthly rate, the amount of deposit, or house sales price. Then, the licensed real estate agent advises whether the house price offered is appropriate compared to the market price. In addition, if house owners tell the agent about specific preferences such as no pets, a female tenant, or a tenant who will reside for more than six months, they find a tenant accordingly. We get a lot of help from real estate agents because they organize related documents and information that we need to know when signing a contract with a tenant. 

Q3. Do you think there should be any legal or conventional changes in terms of a lease contract with a tenant?

A3. It does not need to be changed, but I think it is disadvantageous for tenants that the contract has a two-to-one structure even though it is a natural aspect of the rental contract. A house owner puts a house on the market, pays a commission to the licensed real estate agent when it is sold, and the tenant pays a deposit to the owner. In this system, licensed real estate agents try to impress the owner so that they can take charge of the next sale. I think there is some loss for the tenants in this process. Therefore, there must be fair and capable licensed real estate agents. A tenant generally believes everything the real estate agents say. Homeowners can talk to the licensed real estate agents and adjust housing prices, but tenants cannot do so. I think this two-to-one transaction provides the opportunity to commit vicious crimes. 

Countermeasures to Solve and Prevent House Rental Frauds 

In the wake of a series of housing scam tragedies, the Korean government and the National Assembly has come up with special laws to support the victims. Although direct compensation cannot be made, the government intends to take responsibility for residential stability and policy failures. The plan calls for giving victims the right to buy rental housing first. 

It also includes legal protection measures for tenants who are financially damaged by fraud. If a certain case is recognized as a house rental fraud, the existing rental loan can be paid back over 20 years, and if the victims become credit delinquent for failing to pay back the loan immediately, the overdue information will be erased. The Ministry of Land, Infrastructure and Transport also announced measures to support victims of rental fraud and assist housing stability. The Korea Land and Housing Corporation (LH) will purchase houses that are affected by rental scams and provide them as a public lease for victims by making the property a public rental house and lending it back to the victim at a low rent. 

In addition, the emergency welfare support system, which exists for events of crisis such as a disaster or a calamity, will be made available for household maintenance and living expenses of rental scam victims. However, there is a controversy over the criteria for being recognized as a victim of rental fraud. Under the Special Act of Rental Fraud, all six requirements must be met to be recognized as a victim. 

When signing a rental contract, tenants should carefully verify the homeowner’s information by checking a certified copy of the registration. Moreover, tenants can prevent housing rental frauds if they are insured by schemes such as the “Guarantee for a Refund of Jeonse Deposit.” They must also verify the surrounding lease and sale prices before signing the contract. It is crucial to take appropriate measures before signing the contract because, after signing it, it is virtually difficult to be relieved of the damage. 

Housing rental scam is a serious crime that causes significant financial and emotional change to the victims. However, with awareness and caution, tenants will be able to protect themselves from falling prey to it. In addition, the government should minimize the damage to the public through education and policies related to real estate. They should also actively punish fraudsters and protect victims of rental scams. 

Yim Soo-min 
dlatnals@uos.ac.kr