Using a Straw Man Buyer in a Short Sale Transaction

This is a threee-part article discussing fraudulent aspects of using a strawman in the short sale of residential property to a family memeber in the state of Florida.

With the number of short sales rising throughout the United States, a common question that arises is whether the owner of residential real estate can shorts sell their home to a relative through the use of a strawman and whether or not such a transaction constitutes as either civil or criminal fraud. Let’s start by defining a straw man as a purchaser brought to the table by the seller as part of an orchestrated scheme, usually aimed at disguising the identity of the real purchaser.

The Short Sale Process

In a short sale, the lender agrees to allow the sale of the residence by the owner/debtor for an amount less than the amount of the loan obligation. Once the residence is sold the owner turns over the proceeds from sale to the lender and the remaining balance of the loan obligation is forgiven by the lender. Short sales have become an increasingly popular economic solution because lenders can avoid having to go through a protracted foreclosure process and borrowers can mitigate damage to their credit history and control their debt.

Enter the Possibility of Fraud

The possibility of either civil or criminal fraud in a short sale may arise if the owner of the residence and the relative utilize a strawman with the knowledge that the owner’s lender would not approve of the short sale if it knows that the relative is a short sale purchaser. For example, the owner of the residence, a strawman, and relative agree that the strawman will make a short sale purchase of the residence and after the lender forgives the owner for the outstanding balance due the strawman will sell the residence to the relative for a profit .

At a short sale closing, the owner and purchaser are generally required to execute an affidavit which represents that the short sale is an “arms length transaction,” commonly referred to as an “arms length affidavit.” Such affidavits commonly state the following:

No party to this contract is a family member, business associate, or shares a business interest with the mortgagee. Further, there are no hidden terms or special understandings between the seller or buyer or their agents or mortgagee.

The buyers and sellers nor their agents have any agreements written or implied that will allow the seller to remain in the property as renters or regain ownership of said property at anytime after the execution of this short sale transaction. None of the parties shall receive any proceeds from this transaction except the sales commission.

By signing this affidavit as part of the short sale closing the owner and the strawman will be making a false statement since there is a side agreement to the short sale transaction that the parties have failed to disclose to the lender.