Can Straw Buyers Ever Be Legal?
I was contacted by an investor who asked about using transactional funding. I explained the process and asked him to send me his signed purchase and sale contracts. He complied and when I called the closing agent to confirm that I was the “funding partner” of the investor the closing agent shouted at me that the transaction was illegal!
She went on to explain that I was a “Straw Buyer” and her attorney boss would not do the closing.
I tried explaining that I was not the buyer and the investor would be on title, but she wouldn’t listen.
After talking to the investor I requested that he change title agents and move on to getting the deal closed.
The investor emailed the closing agent that he was transferring the closing to another attorney. In about 15 minutes he got an email back saying that her attorney had “reconsidered” and would do the double closing. She also called me and explained that she had spoken “out of turn” and apologized profusely.
What this agent was referring to as a Straw Buyer transaction is not illegal. A Straw Buyer is a person or entity that is buying a property on behalf of another individual for reasons known only to the buyers. The term Straw Buyer became infamous in the mortgage meltdown era when criminals used unsuspecting people to qualify for mortgage but then never made a monthly mortgage payment. The scam was to get people with good credit to take out loans to buy the properties the scammers had previously purchased.
The scammers then used a corrupted appraiser to over-value a property and move to get a loan to fund the purchase by the victim. The scammers would then sell the over-valued to the victim and make a huge profit. Without going into excruciating detail, the scam worked very well and these guys made millions of dollars before they were caught and sent to jail.
Because of this the term “Straw Buyers” has since been associated with fraud. However, a much more common past and present-day use of Straw Buyers is where a buyer wants to buy a property anonymously. This is common among famous movie stars, wealthy individuals acquiring multiple properties and large companies.
In fact, one of the best-known legal uses of Straw Buyers was used by Walt Disney to accumulate vast acreage in Orlando Florida for Disney World. If land sellers had known that Walt Disney was buying the property for a new theme park his land cost would have skyrocketed and ultimately been too expensive. He used land trusts as his buying entity and these legal entities are still used extensively in real estate investing by savvy investors.
In the above double closing the actual agent who had argued with me about my being a Straw Buyer was corrected by her attorney and the firm did close the deal. This may not be the case if you are dealing with a stubborn agent or he/she simply doesn’t understand what you are trying to do. If what you are trying to do isn’t legal, you’ll have trouble at every closing agent.
As a buyer you have the right to choose the closing agent unless the contract stipulates another closing agent. Your control lies in your paying for the title work which you may contractually have been required to do anyway. Whoever picks the closing agent controls the closing so it’s important that you do your purchase and sale contracts correctly from the start.
If a Realtor® is involved he/she will try and force a specific closing agent on you. Often the Realtor’s Broker owns the closing agent and you can forget about double closings. Fight to use an investor-friendly closing agent from the start to greatly simplify your life!
I wish you limitless success in all you do,
For more information on transactional funding, please go to our FAQ’s.