How to spot a straw purchase in real estate

On Behalf of | Sep 28, 2023 | Commercial Real Estate

A straw purchase in real estate refers to a situation where one person (the straw buyer) acquires property on behalf of another individual, who may not be eligible or may wish to remain anonymous for various reasons. The straw buyer’s name appears on the property’s documents, but they do not intend to own or occupy the property. Instead, they are acting as a front for the true buyer.

Straw purchases can be legal. It’s not that uncommon for someone to purchase property on behalf of another when both parties are aware of the deal and it’s not being done for any kind of fraudulent purpose. For example, a parent may want to buy their adult child a home. Straw purchases are also frequently used by companies who want to acquire property without creating a stir (or causing prices to spike). Disney, for example, famously used straw companies to purchase land in Florida without revealing their plans for Disney World.

When is a straw purchase illegal?

It’s wise to be wary of straw purchases. Three of the most common illegal reasons for straw purchases include mortgage fraud, financial obligation evasion and money laundering.

Mortgage fraud can occur when a purchaser uses a straw buyer to qualify for a loan because they know they wouldn’t otherwise qualify. Straw purchases can also be used to try to evade tax obligations or hide assets in a divorce – and real estate is a tremendously useful vehicle for drug and firearm traffickers when they want to put their profits to use because it generally involves large numbers. That makes it easier to move money around in lump sums.

How can you, as a real estate agent, recognize an illegal straw purchase when you see one? Here are some tips:

  • Know your client: Get to know your clients personally and ask questions about their financial situation. Be wary if a client seems evasive or provides inconsistent information.
  • Verify identities: Ask for and verify the identification of your clients. Ensure that the person buying the property is who they claim to be. Be particularly cautious if the deal involves an overseas buyer and you don’t feel that their representative is being transparant.
  • Question motivations: Ask your clients about their intentions for the property. If their reasons for buying seem unclear, questionable or inconsistent with their financial situation, it may raise suspicions.
  • Beware of cash transactions: Be cautious when handling cash transactions, as they can be used to mask illegal activities. 
  • Use caution with quick deals: If a buyer seems more interested in closing the deal than inspecting the property, that’s a huge red flag. 

Clearly, realtors who knowingly participate in illegal straw purchases can face legal ramifications – but the consequences can be serious even if a realtor didn’t know the purchase was illegal but should have used more caution. They could potentially be held responsible for any damages suffered by other parties, including the lender and seller. 

If you’ve been victimized by real estate fraud, legal guidance is wise.