Reader Question: Is it illegal if a real estate agent has a grandmother purchase a home for them when they are not going to move in the home? They had their grandmother sign all papers as though she was buying the home, and the money came from the agent. There was no mortgage needed. They then had her quitclaim it over to them, and they use it for rental income. I thought this transaction would be illegal but was not sure. Hopefully you can answer this question. Thanks. Mary G.
Monty’s Answer: Hello Mary, and thanks for your question. There is not enough information to provide a definitive answer. Sometimes, things are not always as they appear. All of us should be very careful to form opinions based on facts. The comments below are provided in a general sense and not directed specifically to your question because many facts are unknown.
The “Straw Man”
It is not unusual for a purchaser to use a “straw man” to buy property on their behalf. Individuals and large corporations alike will do this for a variety of reason. For example, they may not want a competitor to know they are acquiring land for competitive purposes. If their true identity were known, they may feel the seller would try to “hold them up” for more money. There are other reasons people utilize this strategy to buy real estate. It is not illegal to engage in this practice. The land assembled in Florida to build Disney World utilized a similar strategy.
While this transaction was cash, most real estate transactions are financed. Many real estate mortgages require the owner to occupy the property as a condition of granting the mortgage. If an owner moves out and begins to collect rent before a set date passes, the loan is in default. Depending on the circumstances or patterns of borrower behavior there could be civil penalties for mortgage fraud.
Invisible to outsiders
It is unusual for a person using a straw man to quitclaim the property into his or her own name soon after closing. For a minor investor as opposed to a large corporation it calls the motive into question. The circumstances in each transaction will determine whether laws have been broken. These circumstances may be difficult to uncover. If a property owner has a debt and sells property to the creditor for fair market value, less the debt, it would not be illegal. However, if it were discovered either or both buyer and seller did not report the transaction to the IRS correctly, but used the transaction instead to hide income and reduce gain, the transaction would be illegal. It is a bit like the philosophical question, “Does a tree falling in the forest make noise if no one is around to hear it?” This is not a smart game to play if prison is not appealing.
A self-dealing agent is a red flag
If a real estate agent were to buy a property for much less than the property’s true value, and deliberately led the seller to believe the offer was a fair market price, it would be illegal.
If a real estate agent went so far as to conceal their true interest in the property by using an unwitting “straw man”, and led the seller to believe that the price the straw man offered was market value when the property value was much higher, it also would be illegal.
The true test for consumers is to understand real estate values. Many consumers have little knowledge about appraisal standards and protocols and little time or interest in learning more. According to the National Association of Realtors almost 70% of home sellers interview only one agent when placing their home on the market.
Law in every state directs real estate agents to treat all parties fairly in real estate transactions. If they do not, penalties can include license revocation. On occasion, real estate agents can sometimes believe their opinion of value is accurate, and damage a seller by error. Ironically, this can happen and yet a seller will sing the agent praises for the quick sale. Some quick sales are because a home was priced accurately, but sadly, sometimes not.
Smart home sellers get several opinions of value, or take the time to learn how to evaluate an opinion of value before accepting an offer on their home.