Straw Buyer
Do this and you can lose everything or maybe in even end up in jail. There is a very fine line between using or being a straw buyer and partnerships. I think the best distinction is if all partners actively participate in the deals. Here is what I mean. I straw buyer is someone who provides credit to a partnership for a fee. A typical example is when Ivy Investor wants to build a rental portfolio but cannot qualify for loans. She pays Carl Credit $10,000 to buy a house and deed it to her. In this example Carl has no intention of making payments on the loan because Ivy has promised to do that.
I have been spending a lot of time of subject-to investing where a seller deeds their property to a real estate investor. That is not illegal. What makes the scenario above illegal is the intent when taking out the loan. Carl’s intent was to deed his property to someone else and never make payments.
This exact scenario has happened to people I know in Denver. They were paid $10,000 and sometimes more to use their credit to buy properties. Here is what actually happened so you get a feel for how dangerous this is. The straw buyer purchased the homes from the investor group at full price. The buyer then deeded the property right back to the investor group. The investor group was able to pull all the equity out of the house using this strategy and then stopped making payments on the loan. The straw buyer was than stuck because their credit was being destroyed but there was nothing they could do since they no longer owned the house. It put them into bankruptcy and the happy investors got off Scott free. I like to call this a win/lose case. There was clearly a winner, the investor group, and there was clearly a loser, the straw buyer. Many teams these scams end in a lose/lose scenario. Obviously the straw buyer loses when they go bankrupt but the investor will also lose when they end up in prison. If you have time I encourage you to Google straw buyer and read about some of the recent cases.
The correct way to use someone else’s credit is to actually make them a partner. They bring the credit you bring value in the way of a great deal or experience or hard work. Combine it is a winning partnership and you divide the profits AND losses. All partners also must meet and play a part in major decisions. There are several ways to structure your agreement but what is important is the credit partner stays involved with the deal making them a true partner and not a straw buyer.
Credit partners are a fantastic way to reach goals. Partnerships really should help everyone involved and often times they do. Do not shy away from partnerships but please proceed with caution.
