Ask Erin: What is an "Arm’s Length" Short Sale Transaction?

In any given week, I receive a dozen calls or emails from folks seeking more information about the possibility of doing a short sale for their Sacramento home. Most folks are just doing fact finding to weigh their options (short sale, vs. foreclosure, vs. loan modification, etc.)…often times they know someone in the process of a short sale, or perhaps they are nearing default on their mortgage and their lender has suggested they try a short sale, or they have just suffered a financial hardship. These folks are on information gathering missions…cool – I am happy to answer questions about the procedural ins and out of short sales. I refer these folks to qualified professionals to answer their tax and legal questions since I can not address those issues.

About a quarter of the inquiries I receive take on a much different tone…they tend to start something like this…”I bought my house in 2005 when it was worth $X. Now in 2009, its worth substantially less. I married my spouse in 2008 and he/she is not on the loan or on the title for my house. I would like to do a short sale and sell my house to my spouse.”

SORRY!

Number one…doesn’t a scenario like that sound like fraud? Sorry, but I will not participate in that. Number two…I did not hear anything about a hardship necessitating a short sale. Number three…most lenders entertaining short sales require that the transaction be at “Arm’s Length.” A short sale lender I have worked with several times requires a document to be signed called an Affidavit of Arm’s Length Transaction.” It reads – “All parties to the contract on the premises dated ______ hereby affirm that this is an “Arm’s Length Transaction.” No party to this contract is a family member, business associate, or share a business interest with the mortgagor. Further, there are no hidden terms or special understandings between the seller or buyer or their agents or mortgagor. 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.”

I hope this clears up any confusion regarding this issue…the seller can NOT benefit in any way from a short sale transaction.