What Is a Straw Buyer?
A straw buyer, or straw purchaser, is a person who purchases on behalf of another person. A straw buyer is used when the real buyer cannot complete the transaction for some reason. However, the act of using a straw purchaser is considered illegal where the transaction involves fraud or purchasing goods for someone who is legally barred from making the purchase themselves.
- A straw buyer is a person who makes a purchase on behalf of another person.
- The act is only considered illegal if the transaction is fraudulent or the goods are purchased for someone who is legally barred from making the purchase themselves.
- Straw buying is sometimes used to buy homes and automobiles when the real buyer is unable to obtain financing.
How a Straw Buyer Works
Straw buying is sometimes used in large purchases such as buying homes and automobiles where the real buyer has poor credit and is unable to obtain financing. The real buyer promises to make all the payments and may compensate the straw buyer for the use of their credit.
Banks dislike the use of straw buyers because the arrangement increases the risk of default on the loan without the bank's prior knowledge of that risk. The activity is also risky for straw buyers who may be held legally responsible for the debt they incurred on behalf of others.
Criticisms of Straw Buyers
A straw buyer can be the focal point for different types of complex scams and fraud schemes. Certain forms of mortgage fraud can include real estate agents, appraisers, and mortgage brokers who make use of the straw buyer for illicit gains. The scheme could be based on a home being purchased in the straw buyer’s name and then quickly flipped at falsely pumped-up prices after the value of the property is overly inflated.
The members of the fraud ring might create false documents to show exaggerated income for the straw buyer, which allows them to obtain more financing than they might normally qualify for. The straw buyer might have been duped into the scheme through misinformation by the other parties.
A developer or builder might use straw buyers when a line of credit is due to expire. A builder might use straw buyers to inflate their property sales volume to qualify for additional financing from their lender. This might be done if the lender bases the financing to the builder on their profits and returns on properties sold.
Straw buyers could be used to secure financing from multiple lenders with the same property as collateral. Unlike examples of legal cross-collateralization, the lenders are kept in the dark about the property being used to cover multiple mortgages. This scheme is typically planned so that the financing closes at about the same time to maintain the ruse for as long as possible.
Example of a Straw Buyer
Using a car buying scheme as an example. In this case, a straw buyer might buy a car for a relative, or a car dealer might use a fake buyer. The collateral of the straw buyer is then grossly overinflated. The straw buyer receives the car and a kickback. Ultimately, the loan is never repaid, and the lender loses all of the loan money and the car. This is an example of the illegal usage of a straw buyer.