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Real Estate Term Tuesday – Straw Buyer

Real Estate Term Tuesday – Straw Buyer

A straw buyer is a person who makes a purchase on another’s behalf, if the real buyer cannot complete the transaction for some reason. The act is only considered illegal when the transaction involves fraud or purchasing property for someone who is not allowed to do so themselves.

Straw buying is sometimes used in large purchases where the real buyer has poor credit and is unable to obtain financing. In this kind of deal, the real buyer promises to make all the payments or compensate the straw buyer for the use of their credit. This is risky both for the straw buyer and the banks involved in the sale, because there is an increased risk of the actual buyer defaulting on their payment and the straw buyer is the one that is legally on the hook.

Another risk for a person willing to act as a straw buyer is that they become vulnerable to fraud schemes. Mortgage fraud rings made up of real estate agents, appraisers and mortgage brokers might use a straw buyer to purchase a home and then flip it for profit, inflating the price duping the straw buyer. Developers and builders might use one when a line of credit is set to expire. They will use them to inflate their property sales volume in order to qualify for further loans, or to secure financing from multiple lenders.

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