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.
Ken Cook - Georgia - FHA, USDA, VA and Conventional Home Loans (678) 439-8683
36 Comments on What Is A "Straw" Buyer?
SEP
11
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.
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.
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".
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
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!
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.
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?
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.
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!
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.
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!!!!
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.
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.
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.
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.
Good post. We've had a rash of straw buyer purchases that have caused some pain lately in our local markets and have led to numerous foreclosures. Lenders need to tighten up on this as this is one of the scams that has threatened our banking system.
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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".
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