The Scoop on Using Straw Parties in Real Estate

The Scoop on Using Straw Parties in Real Estate

What is a straw party?

A straw party relationship consists of a straw man (also known as a nominee or agent) and a principal (also known as a beneficial owner).  A straw man has been defined to mean a mere conduit or medium for the convenience of holding and passing title to real estate.  It has been stated that a straw man is a person who holds naked title for the benefit of another.[1] 

Usually the straw party takes title to real estate and executes loan documents.  The property may then be transferred to the principal, or it may stay in the straw party’s name as long as the financing is in place.  The straw party treats all income and expenses of the property as that of the principal.  A straw party may be a company or an individual.  There is usually a written straw party agreement between the straw party and the beneficial owner.

In such a scenario, the principal wants the straw party to be treated like a distinct legal entity so that incidents of ownership of the real estate as held by the straw party will not pass through to the principal.  However, the principal wants the tax advantages of ownership of the real estate.  Pennsylvania courts have permitted straw party transactions.[2]

When a straw party holds real estate for the real party in interest, all incidents of ownership except record legal title are with the real party in interest.  The straw party cannot benefit from ownership.  In other words, a person who wants to buy a property in his own name and then transfer that property to his company cannot claim the straw party tax exemption. 

Why use a straw party? 

Sophisticated real estate developers and investors use straw party relationships for a variety of reasons.  Below is a list of when it may be advisable to use a straw party:

  • To conceal the identity of a developer.  A developer may wish to assemble land for a subdivision from a large number of plots owned by different individuals.  To prevent a few landowners from holding out for high prices, the developer has straw parties purchase the lots in their respective names.  The various straw parties purchase the land, and they later convey the land to the developer.  If the transaction is executed properly, there would be no realty transfer tax charged on the transfer of the title from the straw parties to the developer. The developer manages to keep a low profile, save money on the purchase of the lots, and avoid the imposition of additional transfer tax.  It is said that Donald Trump used this technique quite frequently in his real estate days. 
  • To avoid personal liability on the loan by the developer.  A developer working on a major project with high risk may want to avoid personal liability should the project fail and the loan go into default. The developer may use a straw party to obtain financing.
  • To avoid problems presented by the beneficial owner’s legal disability.  Perhaps a minor wishes to purchase a property but legally cannot do so nor obtain a mortgage loan to do so.  In such a case, a straw party could be engaged to hold naked title or obtain a loan, all for the benefit of the minor. The property could be conveyed later when the minor is of legal age.
  • To obtain financing for a new company that cannot qualify for financing.  Many lenders do not want to provide a mortgage loan to a company that is unseasoned, particularly if the company has been in operation less than a year.  A straw party may obtain a loan on behalf of the company, with the company paying for the mortgage.  The straw party could later transfer title to the company, with the company continuing to make payments or refinancing to obtain a loan for itself. 
  •  To conceal information from the principal’s creditors.  If the beneficial owner has creditors looking for assets to pursue, then use of a straw party may be a clever way to acquire assets without the creditors’ knowledge. 
  •  To make transfers without the knowledge of or consent of the principal’s spouse.  In such a scenario, the straw party might hold title for many years without transferring it to the beneficial owner. Some people may use this technique if they plan a future divorce or are in the midst of divorce proceedings.
  • To have warranties given by the straw party instead of the principal.  A straw party may have better credit and a greater likelihood of obtaining a loan, which may be more convincing to a seller than a principal with poor credit.  Or the straw party may be able to give certain assurances to the seller that would make the seller more favorable to signing an agreement of sale.   
  • To participate in certain government-subsidized housing programs.  Whereas the beneficial owner may not qualify as a first-time homebuyer or qualify for a subsidy, a straw party may be eligible for such benefits. One should tread carefully to avoid engaging in fraud, as certain types of loans and programs will expect the buyer, seller, and real estate agents to attest in writing that there are no other parties involved.

Problems with straw parties. 

Straw party transactions carry a high degree of risk.  A competent attorney should always be consulted prior to attempting a straw party arrangement.  Below are some problems and risks of straw party transactions. 

  • The straw party defies the principal’s instructions.   A straw party may be free to act on their own, in defiance of the principal. A straw man might refuse to transfer title to the principal.  A straw party might transfer title to a third party.  In many cases it is safer for a principal to create a company that it directly controls rather than engage a person to act as a straw party. 
  • Transfer tax may apply if the deed evidencing ownership makes no mention of the straw party relationship.  The deed(s) and Realty Transfer Tax Statement of Value or similar document should indicate the straw party relationship.  If either document fails to set forth the straw party arrangement, your state’s revenue department may demand payment of transfer tax. Specifically, the deed whereby the nominee takes title and the deed transferring title from the nominee to the beneficial owner must both state the straw party relationship.
  • Many lenders may not approve a loan to a person acting as a straw party.  Conventional lenders in particular may not lend to a person acting as a straw party.  There are inherent risks to lenders with such arrangements. 
  • Issues with probate or the estate if the straw party dies.  If the straw party dies unexpectedly, the estate or heirs of the deceased person might claim ownership of the property. 
  • Fraud.  There are clearly instances where straw party transactions are legal.  Likewise, there are clearly times when improperly-disclosed transactions are fraudulent.  For example, if the nominee obtains a mortgage loan while informing the lender that the property is for their residence only, and the principal lives in the property, then the straw party may have committed fraud.  Full disclosure is often the best course of action. 
  • Damage to straw party’s credit rating.  If the principal stops paying for the loan obtained by the straw party, then the straw party’s credit will be adversely affected.  The situation is even worse if the principal occupies the property, leaving the straw party to pursue court action.

Examples of straw parties.

Bert wants to buy the house on Bunny Lane but does not qualify for a mortgage loan.  Bert tells Larry that if Larry acts as a straw party, then Bert will pay Larry $5,000.  Larry discloses to his mortgage broker that he wishes to obtain a purchase money mortgage to buy the Bunny Lane house as a straw party for Bert.  The mortgage broker finds a lender willing to fund the transaction, but the lender demands a down payment of $20,000.  Bert places $20,000 in Larry’s bank account.  Larry purchases the property using Bert’s down payment funds and the loan.  The deed states clearly that Larry is acting as a straw party.  Bert makes payments on the loan.  Bert has Larry sign a straw party deed over to him, and Bert later files the deed at the county courthouse.  The courthouse clerk reviews the deed and accordingly does not charge the state’s realty transfer tax.  Bert has title to the property and continues to pay the loan obtained by Larry.   Bert pays Larry the $5,000, and both parties are pleased.

Simpson wants to acquire a parcel of land near a major highway to construct a store.  Jones owns the parcel that Simpson desires.  Jones hates Simpson and will never, ever sell to him as long as he shall live.  Simpson asks his distant relative Albertson to enter into an agreement of sale to buy the parcel from Jones.  Jones does not know Albertson and readily agrees to sell.  Simpson pays Albertson the money for the transaction, and Albertson pays the money to Jones.  Albertson ensures that the deed transferring title from Jones states that this is a straw party transaction.  Jones is content with the sale and does not care what the deed says.  Later, Albertson signs a straw party deed over to Simpson.  Simpson owns the parcel and is able to construct his store. 

Lenny just created a Limited Liability Company (LLC) to buy an investment property at a steal of a price.  Lenny heard that LLCs provide a number of protections for real estate investors.  Unfortunately, Lenny’s mortgage broker tells him that the new LLC is not qualified to obtain favorable mortgage financing.  Lenny does not want to lose out on the hot deal, so he asks Mandy to obtain a mortgage loan to buy the property.  Mandy tells her mortgage broker about the straw party arrangement, and a willing lender is found.  Mandy purchases the property, ensuring that the deed discloses the straw party arrangement.  Mandy then signs a straw party deed conveying title to Lenny’s LLC.  The LLC makes the monthly payments, and Lenny pays Mandy a fee for acting as the straw party.

Creating a straw party relationship.

Straw party transactions should not be attempted without the advice of a competent attorney.  A state’s revenue department may retroactively impose realty transfer tax upon parties involved in a transaction that did not properly disclose the straw party arrangement.  A written straw party agreement should be created to spell out the exact roles and activities of the straw party and principal. 

[1] Matthew Bender & Company, Inc., Real Estate Financing § 2C.01 (2003)

[2] Toll v. Pioneer Sample Book Co., 737 Pa. 127, 94 A.2d 764 (1953)

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has owned over 200 properties with various investment partners, and he has been involved in over 200 more transactions as a real estate broker in both Pennsylvania and Tennessee.  Tai and his wife Amira enjoy hunting for investment properties.  Contact Tai if you need some consultation on real estate investing.  Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to  Tai is passionate about helping investors make money and avoid mistakes.

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