Why the Arm’s Length Affidavit Protects Short Sale Sellers

Real Estate Agent with West Coast Realty Division BRE #01824145

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.

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.

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.
Posted by

Pamela Seley


Direct 951.491.4063

CA BRE License # 01824145

West Coast Realty Division

41185 Golden Gate Cir, #106

Murrieta, CA 92562 


Website: Temecula Valley California Homes


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Re-Blogged 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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Pamela Seley, REALTOR®
West Coast Realty Division - Temecula, CA
CA BRE #01824145 Real Estate - Call 951.491.4063

Charles, thanks, glad I could serve up something tasty! :)

Anne, right, I agree, it is people who scam homeowners, not LLCs. You're also correct that many other businesses are LLCs, so I don't mean any disrepect. 


Jan 18, 2012 07:03 PM #62
Pamela Seley, REALTOR®
West Coast Realty Division - Temecula, CA
CA BRE #01824145 Real Estate - Call 951.491.4063

Marlene, I agree. We closed yesterday on a short sale that our first offer was from an investor who wanted to rent back. My sellers said no. When we got final approval, buyer backed out with no explanation, and I believe it was because the sellers refused to rent back.

We later got a owner-occupy, first-time home buyer who is absolutely thrilled to buy this home. My sellers are happy they sold their home to someone who will appreciate and love it as much as they did, instead of a PITA investor. It definitely is rewarding to sell homes to people who will be living in the home. 

Thanks for your comment,


Jan 18, 2012 07:09 PM #63
Pamela Seley, REALTOR®
West Coast Realty Division - Temecula, CA
CA BRE #01824145 Real Estate - Call 951.491.4063

Satar, right, there is nothing inherently wrong with LLCs, or an LLC taking title to property. Thanks for pointing that out! 

Kimo, you and Karen both raise a good argument. In one way it is an intrusion on property rights on the side of the new owner. Shouldn't they be able to rent or sell to anyone they wish to? But, and the big but is, the short sale has one tiny, little condition, the arm's length transaction. IMO, the short sale seller is more at risk than perhaps the buyer, because the seller is gaining the benefit of mortgage debt forgiveness. 

Perhaps lenders will change how they view this and in the future allow rent back, or buy back. Thanks for your comment, I appreciate it!

Jan 18, 2012 07:15 PM #64
Winston Heverly
Winston Realty, Inc. - Atlantis, FL

There will always be those that will find a way to bilk the system. It seems to be the American Way, no pun intended.

Jan 18, 2012 07:26 PM #65
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Rent to own or lease purchase agreements generally do not make sense in this market anyway; especially if you are locked in above market value.

Jan 18, 2012 07:53 PM #66
Gary & April Greer
Century 21 Wright - Temecula, CA
Real Estate Professionals

Congrats on the feature Pamela!

It's interesting to read all of the comments. 

Ironically...we received a bank approval today.  No requirement for hardship or financials provided.  Bank didn't even want it.  And no arms length affadavit.

Go figure.

Jan 18, 2012 08:06 PM #67
Debora Nichols
Residential Sales, Purchases, Investors, Vacation Homes - Phoenix, AZ
Realtor Anthem,Phoenix,Scottsdale,Glendale,Peoria

I am so glad you wrote this.  Sellers seem to want their cake and eat it too.  We should absolutely be referring our clients to an attorney.  But I also think we have an obligation to plant the seed that this type of behavior has consequences.  The current Arm's Length affidavit requires Realtors to sign it too.  Making us a party to the contract.  I will be happy when that changes.  I don't like the idea that we could be held responsible for something the seller does behind our backs and without our knowledge.  Great post. Thank You

Jan 18, 2012 08:16 PM #68
Jack O'Neal
Solutions Real Estate - Phoenix, AZ
High Touch High Tech

You hit right on the mark Great info

Jan 18, 2012 09:14 PM #69
Woody Edwards
First Choice Realty, Inc - Chesterfield, VA
A Realtor® Who Answers His Phone!

We Realtors® need to remember, stay legal, because Washington & the banks will be looking for SOMEBODY to blame when things get better!


Jan 18, 2012 09:43 PM #70
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Pamela - Many sellers want to know why a friend or family member can't buy it or why they can't buy it back.  This gives an explanation for that.

Jan 18, 2012 09:49 PM #71
Pamela Seley, REALTOR®
West Coast Realty Division - Temecula, CA
CA BRE #01824145 Real Estate - Call 951.491.4063

Winston, makes American life interesting.

Gene, I agree, doesn't make sense.

Gary & April, Thank you, that is sweet ! Sounds like short sale fast track. 

Debora, we can control only what we do, and not what buyer and seller do without our knowledge. It would be nice if we didn't have the arm's length. You're welcome, 

Jack, thank you.

Woody, we're an easy target, aren't we?

Christine, thank you. I hope this helps homeowners.


Jan 19, 2012 02:41 AM #72
Stephanie/Bob The Ruiz/Miller Team
Keller Williams Cornerstone Realty - Ocala, FL
The Ocala Dream Team

Hi Pamela,  excellent post, but in our market, short sales are going at 80% of market value.  An investor could sell it back to the seller at market and still make 20% profit.

Jan 19, 2012 06:06 AM #73
Sylvie Stuart
Keller Williams Check Realty 928-600-2765 - Flagstaff, AZ
Home Buying, Home Selling and Investment - Flagstaff, AZ
Good explanation about a very confusing aspect of short sales for some consumers. This will help a lot of people!
Jan 19, 2012 08:01 AM #74
Liane Thomas - Corona & Riverside Real Estate
The Jet Team, Allison James Estates & Homes - Corona, CA
Bringing you Home!

I too have had short sale sellers approach me an want to do a scam. I cannot risk my license and my sole source of income to help them defraud a lender.

Nice post, thank you for the reminder.

Jan 19, 2012 02:03 PM #75
Jason Geary
First American Title - Highland, CA

Great imformation Pam, Thank you for sharing.  If it's too good to be true, it probably is :-)

Jan 21, 2012 11:33 AM #76
Pamela Seley, REALTOR®
West Coast Realty Division - Temecula, CA
CA BRE #01824145 Real Estate - Call 951.491.4063

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.

Jan 21, 2012 01:36 PM #77
Lehel Szucs
All Seasons Real Estate, Inc. - Covina, CA
REALTOR of choice

nice way of explaining this 

Jan 24, 2012 08:14 PM #78
Michelle Carr-Crowe-Selling Silicon Valley Homes in Top Schools San Jose, Cupertino, Saratoga, Palo Alto-Just Call 408-252-8900
Just Call (408) 252-8900! - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

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. 

Aug 25, 2012 11:09 PM #79
Matt Robinson
Professional Investors Guild - Pensacola, FL

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.

Aug 29, 2012 11:05 AM #80
Pamela Seley, REALTOR®
West Coast Realty Division - Temecula, CA
CA BRE #01824145 Real Estate - Call 951.491.4063

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,

Aug 29, 2012 11:12 AM #81
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