Why the Arm’s Length Affidavit Protects Short Sale Sellers

By
Real Estate Agent with REALTY EXECUTIVES OTF BRE #01824145
http://actvra.in/rnM

Why the Arm’s Length Affidavit Protects Short Sale Sellers

On the surface, the arm’s length affidavit appears biased (some may say unfair) because the short sale seller’s lender prohibits the homeowner to rent or buy back their home. The lender is taking less than what is owed on the mortgage, so the condition is the homeowner is not to benefit in any other way, such as renting or buying back the home. The benefit to the short sale seller is forgiveness of mortgage debt.
sold

If the arm’s length affidavit is in favor of the lender, how can it protect the homeowner, or short sale seller? From making financial decisions that could potentially end up costing more money and legal troubles in the future.

Renting after short sale

More than once the question has come up when an investor would like to rent the property back to the short sale sellers, or the homeowners. It may seem convenient to both buyer and short sale seller. Buyer has a built-in tenant, and seller gets to stay in their home.

If an arm’s length affidavit is a condition of the short sale, then it is recommended a short sale seller rent a home elsewhere. It’s not worth the trouble this could bring later to both the homeowner and the investor/buyer.

The best part of a short sale is mortgage debt forgiveness and the chance to start over. Many homeowners who have sold their homes as a short sale are able to buy 2-3 years later.

Another Nefarious Plot – Sell Back
three people
I have heard from homeowners of being approached by investors (usually these are the LLC investors) to buy their home as short sale, and then after the short sale transaction closes, the LLC investor will sell back to the homeowner. Usually the investor plans on selling back far above market value and offers up a lease/purchase option to the homeowner.

There are benefits of convenience to this because obviously (1) the short sale seller has less than perfect credit and will not be able to qualify for a traditional mortgage loan, and (2) although the price is higher than market value it will most likely be considerably lower than what they owed and will seem like a “deal," although the home would never appraise at the inflated purchase price.

A short sale seller’s lender would never approve short payoff if they knew a sell back to the homeowner were to take place after close of escrow.
not

As a Temecula real estate agent who lists homes for short sale and negotiates short payoff, I would never recommend a short sale seller to participate in a scheme to buy back their home.

The most important reason is the arm’s length affidavit the short sale seller signed. If it were ever found out the short sale seller bought back their home, this could cause legal problems far worse than only the financial troubles of not being able to pay a mortgage.

Mortgage fraud comes with a penalty of jail time and fines.

Second, the sell/buy back defies logic. Why buy back a home at a price that is far higher than market value? Especially since it will be decades before home prices reach the pre-great-recession prices that buying at a price above fair market does not make financial sense. What does make sense is for the short sale seller to rent for a couple of years, and then buy another home at fair market value.

It may seem the arm’s length affidavit is punitive to the short sale seller, but ironically, it also protects a short sale seller from taking an action that would be impossible to undo and could potentially get them in legal and financial trouble. The whole point of a short sale is to help a homeowner, not hinder them.

Most lease/purchase options favor the seller, not the buyer. A home buyer considering a lease/purchase option should consult with an attorney before signing a lease/purchase option contract.

Note: Broker/agents are not qualified to give legal or tax advice. It is broker recommended that a homeowner, when considering to short sale, get legal and tax advice from a qualified attorney or licensed tax preparer for tax consequences of a short sale.
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Re-Bloggged 4 times:

Re-Blogged By Re-Blogged At
  1. Lisa Wetzel 01/17/2012 09:13 PM
  2. Laurie Clark CRB Angel Realty LLC Your Monument Realtor 719-502-6572 01/18/2012 09:39 PM
  3. Gabe Sanders 01/23/2012 06:27 AM
  4. Winston Heverly 08/25/2012 11:04 PM
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Topic:
ActiveRain Community
Location:
California Riverside County Temecula
Tags:
arms length affidavit
temecula short sales

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Rainmaker
604,275
Pamela Seley, REALTOR®
Menifee Lakes California Real Estate
REALTY EXECUTIVES OTF

Bob, then it's probably worth it for investors to buy short sales. Thanks for your comment,

Sylvie, I hope so. Thanks!

Liane, same with me. I like selling real estate and want to keep my license! You're welcome.

Jason, you're welcome. Yep, I think so. Thanks for stopping by.

January 21, 2012 01:36 PM
Rainer
213,983
Lehel Szucs
REALTOR of choice
All Seasons Real Estate, Inc.

nice way of explaining this 

January 24, 2012 08:14 PM
Ambassador
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Michelle Carr-Crowe Just Call 408-252-8900 Luxury Homes in Top Silicon Valley Schools-San Jose, Cupertino, Saratoga & Palo Alto
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Just Call 408-252-8900 Lynbrook Homes Cupertino KW

As I understand it, the intent of the Arm’s Length Affidavit to Protect Short Sale Sellers is to prevent fraud and unfair gain from ANYONE involved in the transaction. 

August 25, 2012 11:09 PM
Rainmaker
124,583
Matt Robinson
Pensacola Real Estate (850) 292-4000
ERA Emerald Coast Realty

As an investor who has done quite a few short sales (well over 100), I would never consider selling or renting back to a seller for a second, even if it was allowed.  They are in a foreclosure situation because a hardship caused them not be able to make their payments.  If they have shown that when times get tough, the 1st thing they neglect is the house payment, why would I want them as a tenant?  It's just bad business.

August 29, 2012 11:05 AM
Rainmaker
604,275
Pamela Seley, REALTOR®
Menifee Lakes California Real Estate
REALTY EXECUTIVES OTF

Lehel, thanks!

Michelle, buyer and seller can both get in trouble, but seller could have their short sale rescinded. I think mortgage fraud is punishable with jail time, too.

Matt, good point. One of my buyers just received an Arm's Length Affidavit and in it states the buyer will not sell or transfer title to the seller ever in the future. It's not difficult to run title reports on properties, so I don't recommend a buyer/investor of a short sale to rent back. There are many other people out there who need homes to rent. Finding a tenant is not a problem. Thanks for your input,

August 29, 2012 11:12 AM
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Rainmaker
604,275

Pamela Seley, REALTOR®

Menifee Lakes California Real Estate
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