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.
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
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.
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.