A straw buyer is a person whose name and credit profile are used to purchase real estate for someone else who could not or would not qualify for the financing independently. The straw buyer may be offered a fee, told it's a legal arrangement, or misled entirely about what they're signing. Regardless of the presentation, using a straw buyer in a real estate transaction is mortgage fraud.
How Straw Buyer Schemes Work
The organizer of a straw buyer scheme needs someone with clean credit and qualifying income to obtain financing. They approach an individual with those qualifications, offer compensation ranging from a few thousand dollars to a portion of the deal's profits, and explain that the person's credit is only needed temporarily or that they'll be removed from the loan shortly after closing. Neither is true.
The straw buyer signs loan documents, takes title in their name, and becomes legally and financially responsible for the property and the loan. The organizer controls the actual property, collects rent, makes decisions, and at some point stops making the loan payments. Default follows. The foreclosure appears on the straw buyer's credit. The straw buyer may also face federal prosecution for mortgage fraud.
Investor Straw Buyer Schemes
In real estate investment fraud, straw buyers are used to purchase properties at inflated prices arranged by the scheme organizers. Multiple properties are purchased through multiple straw buyers, loans are taken out based on inflated appraisals, and the excess loan proceeds are extracted by the organizers. The straw buyers are left with properties worth less than the loan balances when the scheme collapses.
Consequences for Straw Buyers
Straw buyers who cooperate with these schemes, even in good faith, face serious consequences. Mortgage fraud is a federal crime. Prosecution can result in prison time and significant fines. The straw buyer's credit is damaged by the defaults that typically follow. If the FBI or HUD investigates and the straw buyer signed false documents, they are a target regardless of whether they understood what they were doing.
"I didn't understand what I was signing" and "they told me it was legal" are not effective defenses to federal fraud charges. If someone is asking you to buy property on their behalf because they can't qualify, walk away.
Protecting Yourself
Never allow your name or credit to be used for a property you don't actually intend to purchase and control. Never sign loan documents that describe a transaction different from what you understand to be happening. If a deal includes any arrangement where someone else will make the payments, handle the property, or "take it off your name" after closing, that arrangement is almost certainly fraudulent.
Related: mortgage fraud and appraisal fraud.