What Is A "Straw" Buyer?

By
Services for Real Estate Pros with Digital Content Creator

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 

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I started writing on Active Rain in 2006 when I was representing the mortgage industry. I am no longer in that industry and many of the older posts contain outdated information. Please do not contact me for LENDING or MORTGAGE questions but rather contact a licensed mortgage professional from your area. I have always been in marketing and branding and that is still what I do. Thanks for reading!

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Anonymous
Anonymous
Anonymous
Appreciate your explanation of a straw buyer.  Truthfully, I've never seen this happen. 
Sep 11, 2007 08:45 PM #17
Rainmaker
652,773
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes
Interesting post. will have to come back and digest it later.
Sep 11, 2007 09:02 PM #18
Rainmaker
158,751
Leo Namiot
www.LeoLends.com: CT Low Rate Mortgages - Waterbury, CT
CT Mortgage Lender - FHA, VA - CT First Time Home Buyers, USDA, FHA, VA

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

Sep 11, 2007 09:29 PM #19
Rainmaker
271,223
Ken Cook
Digital Content Creator - Marietta, GA
Writer For Hire
Leo I think you are okay unless you put the hay on someone else's lawn.
Sep 11, 2007 09:43 PM #20
Rainmaker
158,751
Leo Namiot
www.LeoLends.com: CT Low Rate Mortgages - Waterbury, CT
CT Mortgage Lender - FHA, VA - CT First Time Home Buyers, USDA, FHA, VA
Thanks Ken, I can now sleep tonight....
Sep 11, 2007 09:59 PM #21
Rainer
19,339
Christi Stewart
Prudential California Realty - Laguna Niguel, CA
Prudential Calif. Realty
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! 
Sep 11, 2007 10:17 PM #22
Rainmaker
407,675
Karen Monsour
Coldwell Banker Fort Lauderdale Beach - Fort Lauderdale, FL
REALTOR, SSRS - Sells FL Waterfront, Short Sale Expert!

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 11, 2007 10:54 PM #23
Rainmaker
451,192
Allison Stewart
St.Cloud Homes - Saint Cloud, FL
St. Cloud Fl Realtor, Osceola County Real Estate 407-616-9904

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.

Sep 12, 2007 05:25 AM #24
Rainer
115,012
Rich Schiffer
Swarthmore, PA
Referral Agent, e-PRO

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.

Sep 12, 2007 06:51 AM #25
Rainmaker
271,223
Ken Cook
Digital Content Creator - Marietta, GA
Writer For Hire

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

Thanks everyone for your GREAT responses!

Sep 12, 2007 08:15 AM #26
Rainer
58,052
Virginia Halter
RE/MAX Signature Properties - Harrisburg, NC
ABR, CDPE, CRS, GREEN, SFR, SRES

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... 

Sep 12, 2007 10:03 AM #27
Rainer
288,198
Diane Aurit
LKN Realty, LLC - Mooresville, NC
Lake Norman Real Estate
Thanks for the great info...I had never heard this term and appreciate the background.
Sep 12, 2007 03:34 PM #28
Rainmaker
329,826
Tom Burris
NMLS# 335055 - Dallas, TX
Texas Mortgage Dallas Mortgage FHA

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.

 

Sep 12, 2007 03:46 PM #29
Rainer
28,179
Judi Glamb
Coldwell Banker Hearthside - Hellertown, PA
Associate Broker, ABR
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. 
Sep 12, 2007 03:54 PM #30
Rainer
33,314
Robin Siddle
Tucson Expert Agents LLC - Tucson, AZ
Robin M. Siddle, Broker
Great job of explaining this one.
Sep 12, 2007 04:27 PM #31
Rainmaker
271,223
Ken Cook
Digital Content Creator - Marietta, GA
Writer For Hire

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

You guys are ALL great commentors, thank you all! 

Sep 12, 2007 05:08 PM #32
Rainer
28,179
Judi Glamb
Coldwell Banker Hearthside - Hellertown, PA
Associate Broker, ABR
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 13, 2007 01:08 PM #33
Rainmaker
357,020
Donna Yates Real Estate - serving
ReMax Town and Country - Blue Ridge, GA
North Georgia Metro & Mountains
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 28, 2007 07:22 PM #34
Rainmaker
271,223
Ken Cook
Digital Content Creator - Marietta, GA
Writer For Hire
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.
Sep 29, 2007 08:06 AM #35
Rainer
127,421
Dan Quinn
Prudential PenFed Realty - Silver Spring, MD
Dan Quinn

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.

Oct 11, 2009 07:48 AM #37
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Rainmaker
271,223

Ken Cook

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