Can I Short Sale My Home To A Family Member?
Can I Short Sale My Property to a Family Member?
Many of homeowners whose mortgages are underwater and who have willing relatives to help them out through a short sale are commonly asking the question: can I short sale my property to a family member? The answer to this is an outright ‘no’, with no other ‘if’s’ provisions. There is also no way around this fact that is not legal. The reason behind this is that a homeowner is prohibited by lenders to short sale their home to a family member. This is formally agreed upon between the bank or lender and homeowner through a document called an arms-length affidavit.
So, why do lenders or banks require homeowners to execute an arms-length affidavit?
With many foreclosures and short sales happening these days, mortgage fraud is as prevalent. There are individuals who take advantage of homeowners whose mortgage are underwater to make a hefty profit out of a short sale. Short sales are particularly very attractive since the price is very cheap in comparison to a regular sale. When resold for the right price or under favorable economic conditions these homes can result to a profit; a profit that should have gone to the lender in the first place. While relatives or friends have good intentions of helping homeowners go through tough times, the reason why the answer to the question: can I short sale my property to a family member?, is a ‘no’ is because the primary condition of a short sale would be defeated. A lender primarily agrees to a short sale provided that the homeowner or seller does not gain anything from the transaction. So if a homeowner short sale his home to a relative who then later on transfers it back to the original homeowner, the homeowner will not only have benefited a discount (which was the deficiency on the sale) but would have kept his home from getting foreclosed as well. It would not seem fair for the homeowner to gain these benefits while the lender agreed to a loss (the ‘short’ or deficiency on the short sale).
Another reason why the answer to the question: can I short sale my property to a family member, is a ‘no’, is that relatives and friends can easily be asked to take the part of a straw buyer or a pretend-buyer. Mortgage fraud may not only happen between seller and buyer but can also involve third parties such as real estate agents and appraisers. Lenders ordinarily require a broker price opinion or BPO from real estate agents or an appraisal from a licensed appraiser. And while these persons are usually those they are affiliated and have worked with, real estate agents representing the buyer or the seller can strike a deal that will result in a low appraisal value. This is notwithstanding a higher than mortgage home value, in order to get the lender to approve a short sale.
After the short sale, the home can be later on sold for the amount equal to the real appraised value; thus resulting into a profit that should have been realized by the lender. This situation is very common among home flippers who take advantage of the low price of short sale homes.
What are the provisions on an arms-length affidavit?
Since lenders have their own affidavits ready to be filled up already, the provisions on the arms-length affidavit tend to 
vary. However, these are the provisions on a typical arms-length affidavit.
- The homeowner, which in this case is the seller, is not allowed to sell the property to a family member, business partner or any other person whose relationship to the homeowner is akin to a relative.
- Buyer should not sell the property within a 90 day period.
- Seller should not rent the property or buy it back from the buyer since these conditions amount to a benefit for the seller.
- There should be no transactions between seller, buyer and agents that will result to a deceit to the lender. This includes deals made between buyer and appraiser to achieve a fake low appraisal value.
- No party involved in the short sale should gain anything; commissions to agents are exempt from this provision.
Apart from these provisions, a typical arms-length affidavit should also contain:
- Servicer’s name
- Property information: home loan number and address
- Signatures of the seller, buyer and Realtor
- A notary seal
What happens when the provisions of an arms-length affidavit is violated?
If you already know that the answer to the question: can I short sale my property to a family member, is a ‘no’ and still short sale your home to a relative, the consequences can be severe. And no matter how good the intention of helping a relative is, violations to an arms-length affidavit is a federal offense and if proven, can result to jail time and hefty fines. Additionally, an arms-length affidavit is a basic lender requirement before approving a short sale so going around the prohibition of selling to a relative is not just an option.
Given these facts, the answer to a common homeowner question, “Can I short sale my property to a family member? is definitely a resounding ‘no’. While relatives are the best persons to go to for help during a short sale, it can result to a mortgage fraud. Instead, homeowners can seek the help of real estate agents who can help them explore the best options available. In this case, we are those agents! We are a Network of highly knowledgable, Skilled, and most importantly, experienced Short Sale Specialist Realtors. We have the proof to back up our name and we are ready to complete your short sale, so contact us now!
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