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 Fair Definition of Straw Buying
Ken Cook - Georgia - FHA, USDA, VA and Conventional Home Loans (678) 439-8683
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!
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
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.
Hey Ken,
That was a great article about straw buyers, very informative.
Sean Allen
Ibought some hay the other day for fall decoration,does that make me a Hay Buyer?
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
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...
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.
Judi I think that's only money laundering, not straw buying ;)
You guys are ALL great commentors, thank you all!
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.