Dear Monty: Can a real estate transaction be illegal?

• 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.

  Mortgage fraud

  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.

via:http://www.postsouth.com/article/20140219/NEWS/140219589/1293/FRONTPAGE