What Is A "Straw" Buyer?

By
Real Estate Services 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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Tags:
mortgage fraud
straw buyers

Comments 36 New Comment

Rainmaker
271,087
Ken Cook
Writer For Hire
Digital Content Creator

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

You guys are ALL great commentors, thank you all! 

September 12, 2007 05:08 PM
Rainer
28,179
Judi Glamb
Associate Broker, ABR
Coldwell Banker Hearthside
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.
September 13, 2007 01:08 PM
Rainmaker
340,713
Donna Yates
Real Estate North GA Mountains & Lakes Blue Ridge
Coldwell Banker High Country Realty
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.
September 28, 2007 07:22 PM
Rainmaker
271,087
Ken Cook
Writer For Hire
Digital Content Creator
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.
September 29, 2007 08:06 AM
Rainer
127,314
Dan Quinn
Dan Quinn
Prudential PenFed Realty

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.

October 11, 2009 07:48 AM
Rainmaker
271,087

Ken Cook

Writer For Hire
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