Real Estate Blog - What Is A "Straw" Buyer?

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What Is A "Straw" Buyer?

Sometimes we use terms familiar to our own little clique but confusing or misunderstood to others. There is one term in particular we hear in my business somewhat frequently that is obviously misunderstood by many. The term I am writing of is "straw buyer". This blog has a dual purpose and that is to define the term and briefly explain why it is a problem and even illegal.

Here is a straw scenario for you and it is very often used by people who just can't seem to understand how it can be a problem. Let's say you find a lovely new home you like and you enter into a contract to purchase it. During your workings with your banker you find out you can not qualify for a loan to purchase the home. Your brother, however, who has great income and great credit is willing to get the loan and "purchase" the property for you as though he intends to occupy it and for his trouble you will give him $500. Your brother just committed mortgage fraud and you just engaged the services of a "straw buyer".

A straw buyer is a person who uses or allows their credit to be used for the purchase of a property they never intend to use or control. Straw buyers can also be used to purchase non-owner occupied properties by being paid simply for the use of their credit. The ads on Craig's List look like this:

CREDIT PARTNER - GET PAID FOR DOING NOTHING!
All you need to do is let us use your credit score to purchase properties and we will handle everything else. We will make the down payment and pay the monthly mortgage note and give you $10,000 for each purchase you make. You don't even need to come to the closing! Call Leroy at 404-555-1212 and I will give you $10,000 cash on your first deal by the end of this month!

Of course you may not be so inclined to answer an ad so sometimes it comes from an industry insider such as an investor or more likely than not a "bird dog" (unlicensed real estate agent). It can even happen if your mother-in-law actually uses her credit to buy your home and she does not live in or control the home. Even if she goes to the closing it can still be a straw purchase.

The common disinformation says that a straw buy is always fraudulent in other ways. This is not true ... anytime one person applies for a loan for a property they do not intend to live in for the purpose of allowing another person to live in and control the property this is a straw buy. IF the "straw buyer" does not intend to occupy the property AND they apply for an investor loan AND they use their credit and their funds to purchase the property THEN they can do whatever they want EXCEPT let someone else directly make the payment. The payment still needs to come from the investor.

Why is this illegal if the mortgage gets paid? Because of RISK posed to the lender. You make false statements to lower the perceived risk and therefore commit mortgage fraud by making false statements (I intend to occupy the property) to the lender at the time of application.

A Recent Straw Buyer Scheme

A Fair Definition of Straw Buying

Posted by Ken "Yes You Can" Cook on 09/11/2007 04:55 PM

Comments (36)

mortgage fraud, straw buyers

Originally posted at: Georgia FHA Home Loans - (& Opinion): What Is A "Straw" Buyer?

36 Comments on What Is A "Straw" Buyer?

SEP

2007

Haha, straw buyers are everywhere! I've worked in real estate, in car sales, and in all sorts of other sales, and if there's a contant thread that ties them all together, it's the straw buyer. The guy that sends his mom in to be the "primary driver" of the car he can't really afford. Or the uncle who's trying to buy a house that his niece will actually be paying for. And consumers blame the lenders, brokers, and mortgage companies for their foreclosures. Maybe they should look at some of their own borrowing practices.

These jacklegs have killed a couple of neighborhoods in Charlotte. And then folks act surprised that it's bad...

You stated "Why is this illegal if the mortgage gets paid? Because of RISK posed to the lender." It may be a technical issue, but the "legality" of any fraud or scheme is not based on RISK posed to the lender. Fraud can be civil or criminal. In the civil sense, if there's no harm, there's no case. In the criminal arena, fraud is deception made for personal gain and comes in a lot of flavors. In the mortgage sense, signing an application or otherwise knowingly making false statements to profit from your deception is fraud...and yes, it does increase risk to the lender. But it's important to keep in mind that RISK alone is something lenders assume with every loan and some are riskier than others. Risk doesn't make or create fraud...lying and deception do.

Ken, Great post! I hope this would be a feature. You really explained it quite well

Fraud Detection and Prevention Right, Jason, you are right and that is, indeed, the entire paragraph. For the simplistic minds of some people who don't consider "a little white lie" to be any big deal I started with the explanation of why lying on a mortgage application is a problem. You and I are bright enough to know that lying is lying and there really doesn't need to be any further discussion. But after having taught mortgage fraud classes and spoken at events I've heard the questions. Trust me, they needed that statement about risk because they aren't all as bright and moral as we. Honestly, I don't know how many people who have heard me say "it's mortgage fraud to lie on your application" immediately raise their hands and ask, "But why is that fraud? Who does it hurt?" Thus the first sentence following the "why".

Thanks for your comment!

Ken. Gotcha. Thanks for the follow up. Mortgage fraud is a huge problem, so I'm glad to see your comments on the topic!

Good points about a straw buyer, I remember the first time I had heard the phrase.

Ken,

Great post! There are situations in our state(PA) when straw buyers are legitimate. In cases where the identity of the actual purchaser may be prejudiced by the seller who may be unwilling to sell to a specific individual. Most of these transactions do not involve financing, however. Thanks, Fran

Really informative and very timely thanks for posting that.

Ken,

Great article!

When I first started working in real estate, an "investor" tried to get me to find him properties to do this exact thing. To make matters worse, he wanted enough "equity" in the property so he could "cash-out" at least $70,000. on each deal. The gall!!! Unbelievable!!!

Just a word of warning, these type of people look for new agents. They are con artists. They use cousins, brothers, sisters, etc. They also protest in some cases to have their own "banks" and pathetic bogus letter-head with a ficticious mortgage lender. Obviously, someone tried to pull this on me. Thank heavens for a good broker!

Karen Monsour, Fort Lauderdale, FL 954-464-4194

Thanks for the "straw buyer" explanation. Everyone should be aware the untruthfullness is fraud when it comes to signing mortgage documents. Plain and simple.

In our market I know of an investor, a Realtor, and a Title Company owner who are now sitting in Federal prison for their schemes.

Thanks for the explanation.

Straw purchasers were very common in the car business....the term means the same thing there, and it is just as illegal. What makes it a problem there is if payments stop coming in...how do they find the car?

Hey Ken,

That was a great article about straw buyers, very informative.

Sean Allen

This was a common thing in our market a few years back... a local police officer for one our our counties largest cities was busted at the almost top position of one of these lending schemes. It's amazing what people will do when greed for $$$$ takes over all of their thought processes... Keep it legal or you'll be doing time in the Federal Prision of your choice. You'll also get a courtesy call and potentially several visits from your friendly FBI. Hey folks, lets keep our business legal.

I have seen this done a few years back, and was not a party to the transaction but became aware of it after the fact. I was not sure the neighbor was telling the truth so I just let it go. Pretty much the same issue. The sister had her brother purchase a condo for her. she pays the payment and lives there, but it was his credit and money that made the purchase according to her. Who knows. Nice post.

Appreciate your explanation of a straw buyer. Truthfully, I've never seen this happen.

Interesting post. will have to come back and digest it later.

Ibought some hay the other day for fall decoration,does that make me a Hay Buyer?

Leo I think you are okay unless you put the hay on someone else's lawn.

Thanks Ken, I can now sleep tonight....

Thank you for that defination. I haven't heard that term but have heard of that type of scenario. Another new thing learned by being an ActiveRain member :) Love it!

Too funny Leo.

Just beware...they go after the new agents. They think they are smarter than we are. Just keep the scenario in mind.

Karen Monsour, Fort Lauderdale

SEP

2007

Ken

This is a great post. You did an excellent job of explaining the terminology and what the implications are for participating. A very enjoyable read. Congrats on your feature! Well done.

Straw buyers exist in many forms. People who buy alchohol or cigarettes for underage recipients are one form of straw buyer. In Philadelphia, the DA's office is cracking down on Straw Buyers of handguns: People with a clean record buying a gun for someone with a criminal background, that would not pass the background check requirements. In many of these cases, the person who bought the gun ends up doing jail-time.

Thanks for taking time to shed some light on this shady topic.

Rich - thank you for sharing some otherstraw purchases. That should help even more people "see the light".

Thanks everyone for your GREAT responses!

That is a term I had never heard before. Thank you for explaining it. I have heard of the scenario being done. Sad. I know some neighborhoods in the area that have suffered greatly from this horrible practice. And people don't have an idea that it is WRONG!!!!

If it sounds too good to be true then...

Thanks for the great info...I had never heard this term and appreciate the background.

I haven't seen any of these lately. But at a prior place I worked, we had a couple. Both were averted with a lender field review of the appraisal.

I had this term thrown at me at the settlement table - a last minute change. Since two, possibly three attorneys were involved, I wasn't going to question it. It was a timing issue of sorts and on paper only - it was a cash deal and the real intended buyer provided the funds.

Great job of explaining this one.

Judi I think that's only money laundering, not straw buying ;)

You guys are ALL great commentors, thank you all!

SEP

2007

Ken - they used the word straw - it was a 1031 exchange - if I recall correctly this ended up being a solution to the delayed settlement of the 1031 property being (a day or two). I had nothing to do with it - and it was all decided between the attorneys so I wasn't going to challenge/argue - especially since I was primarly representing the seller (her laywer was involved too). I've worked with two of the attorneys involved and they seemed to be on the up & up.

SEP

2007

Ken: I wonder how many straw buyers realize it's mortgage fraud? I wonder if they have any idea what the penalty is for mortgage fraud? Very good post.

SEP

2007

Donna - from experience I know that a fair number of real estate professionals don't even realize it is illegal so it stands to reason that many straw buyers are clueless. This is one reason I posted this and as you'll see a few people may have heard the term but didn't really know what it was.

JUL

If it seems too good to be true, it probably is. This topic brings to mind a scene from the movie "Blow." Yes, you can glean lessons about life from a movie about the origins of the West Coast cocaine blizzard of the 70's and 80's. The scene goes like this. Johnny Depp's character George Jung (who is in this scene a child,) is asking his dad about making it big - having loads of money. I don't remember the exact question asked by young George to his dad, but here's the response:

'When you're on top, it's never as good as it seems.' "Money isn’t real, George. It doesn’t matter. It seems like it does, but it doesn’t."."

For more, check out:

http://www.filmmonthly.com/Video/Articles/Blow/Blow.html

http://www.moviequotes.com/fullquote.cgi?qnum=11562

http://www.moviequotes.com/repository.cgi?pg=3&tt=209527

Well said, and a very poignant if not timely reminder for Real Estate and Mortgage professionals still in the game. Young George was ambitious from a very young age. Who doesn't want to attain a level of success that brings financial freedom? The question is though, what are you willing to sacrifice, to negate, and to ignore; in order to get what you want. Do the ends justify the means? Are you paving the road to Hell with good intentions? Even and especially in this leaner, MEANER market. Be aware, beware, and be vigilant in limiting your exposure to fraudulent business practices, and ensuring that you do not build, maintain or stitch together your dwindling business on a foundation of fraud. Here is what happened to me, and almost got me caught up in what might be one of the greatest threats to our various specialties within the world of real estate and real estate finance. Schemes that look innocent enough, but are in fact, devious and quite damaging both to the moral fiber of our respective industries, and down the road to our entire nation's collective quality of life.

I am a relatively new agent, in that I don't have decades of experience, and this is my first time witnessing the down portion of the cycle in our business as an active licensee and participant. (I have been an Appraiser for 5 years, Mortgage Broker for 3, and a Real Estate Agent for 1.) Recently I had a former loan officer that I have known for years, but only recently found out was a loan officer in the last few years; approach me about first using my credit and then progressing to asking me to find other straw buyers. From the start something told me that this had all the trappings of a fraudulent buying scheme. As others have stated, I questioned my own nerve, wanting to believe this was just a way of making money that I was not aware of, but that was legal, and a common practice. From the start, just enough was explained about the process to get me interested and to begin the process. From what I understand, this guy has done this several times.

The more I asked about the legality of this "system," the more I kept hearing speeches that took on a hustler specific tone and "rhythm." A word of caution that once again speaks to the gall these scammers have; when I asked whether or not this was legal, the person trying to recruit me to join the ranks of the Injustice League, responded with this gem: 'It might not be ethical, but its legal.' That was my first clue. So I googled some of those terms used, and cross referenced several of them with "fraud" and "mortgage scams." Low and behold, I came across a a couple of articles that may be of some use to those of us who are less experienced with the 31 flavors of mortgage fraud, and therefore more succeptible to deception, and more insidiously to being convinced to becoming unwitting accomplices to its many manifestations. Many of us could make a lot of money if we were so inclined, with the caveat that we would also have to be willing to commit fraud, and essentially morally/ethically bankrupt. Lucky for me -- not to mention for my clients and for the already crippled housing market -- that I am neither dumb enough not to ask questions nor desperate enough to jeopardize my sense of morality, professionalism, and long term success for short term gains. Here they are, and I hope they help.

Aaron J. Feit

Mortgage Broker, United Banc - Miami Beach, FL

Sales Associate; Realtor, South Beach Real Estate - Miami Beach, FL

Appraiser, First Atlantic Appraisal Services - Miami, FL

786-260-7628

ajfeit@mac.com

http://realestate.msn.com/buying/articlenewhome.aspx?cp-documentid=546052

http://www.mortgagefraudblog.com/

http://www.netnewspublisher.com/35-million-foreclosure-assistance-scam-busted-in-maryland/

http://www.magicbullets.com/forum/showthread.php?t=299

http://www.capitaltexas.com/EthicsinRealEstate

http://www.courier-gazette.com/articles/2008/07/06/mckinney_courier-gazette/news/wnews01.txt

http://www.flippingfrenzy.com/about_fraud/index.html

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