Sara Routhier, Managing Editor of Features and Outreach, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming worl...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 20, 2012

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A straw buyer is a person that buys a home on behalf of another person. As one can imagine, this is frequently used in fraud crimes when a person wants to buy a home but has poor credit or is unable to obtain financing. While straw buyers are not in and of themselves illegal, they are a key component of many fraud crimes.

In straw buyer-based purchases, a straw buyer is paid by a “real buyer” in order to cover mortgage loan payments. On top of that, the real buyer also pays the straw buyer for their services and for the use of their credit.

Naturally, banks and lenders do not like straw buyer-based purchases since these expose banks to a higher risk of default since the actual person paying the mortgage loan is unknown to them. Just as with conventional mortgage borrowing, the practice of using straw buyers cuts both ways since they are vulnerable to credit score damage while being legally responsible for the debt they sign on. Straw buyers rely on the real buyer to continue to pay them for the home, assuming the straw buyers do not have the financial resources to pay for the mortgage themselves.

In fraud crimes that necessitate a straw buyer, typically a real estate agent or broker acting as a facilitator locates a person who has good credit and is willing to purchase a home on behalf of another person. While oftentimes the other person is a friend or family member, sometimes it is a stranger or even a fictitious individual. Some straw buyers may even be deluded or misled into thinking that they are actually helping a less fortunate person who cannot obtain an expensive home loan on their own.

The agent or broker offers their chosen straw buyer several thousand dollars to sign the paperwork for a mortgage loan using all relevant personal financial information. Other straw buyers are pressured by facilitators to falsify their income or sign pre-made documents. This is all done with the understanding that the straw buyer does not intend to live in the home that they are agreeing to finance.

Straw buying becomes illegal either when information is falsified or once the broker or agent who is facilitating the fraudulent operation decides to sell the home at an elevated price. Doing so usually results in the facilitator and the real owner splitting profits with the straw buyer when the property is resold at a higher price—but not always.

In some versions of fraud, the real buyer and facilitator make off with the proceeds from the mortgage loan. They then stop paying the straw buyer for the mortgage loan, and the straw buyer is left legally responsible for the remainder of the financing. Since not all straw buyers can afford these payments, many end up facing default, bankruptcy, or even criminal charges for fraud.