Short sales are deceptively named, as they take a very long time to facilitate. The name short sale actually refers to the reason for the sale: the amount owed on the property is more than it is worth (it falls short), and when an owner can no longer pay or has extenuating circumstances, the home is put back on the market by the bank and the owner is released from the mortgage agreement once a new buyer is secured. One of the reasons why the short sale process takes a long time is because there are many different legalities that require attention. As a seller, one agreement you need to sign is known as the arm's length affidavit.
What is the arm's length affidavit?
This is a legal document that restricts you from selling the home to a close friend or relative. Basically, when offers come in for the home you are selling, they must come from people who do not know you and have no influence or knowledge of your housing situation or your finances.
What is the affidavit for?
It can be frustrating to turn down a legitimate offer from a sister, cousin, or parent. But, this affidavit protects the bank from the possibility of mortgage fraud. In the case of a short sale homes are often sold several thousand dollars below market price, and banks can lose money (or they can lose potential income from interest) by agreeing to a short sale on your behalf. If a relative buys the home, and then sells it back to you for the reduced cost, this is a way to get around the cost of the previous mortgage, shorting the bank money that you originally owed.
In a short sale agreement with the bank, the seller is not permitted to profit from the sale. An arm's length agreement ensures that the property is not being deeded back to the seller in any fashion, even as an investment property or a rental.
What must be included in the agreement?
First, the affidavit outlines the basics of the short sale agreement, including the full names of any and all owners of the property, the lender, the broker, and any legal representation present. The document short identify itself as an arm's length affidavit, just in case it is needed later to prove that the seller went into short sale process fully understanding the restrictions.
Usually, arm's length affidavit's include provisions restricting sale in the following cases when the buyer is a relative, colleague, investor, or business partner or associate. But the affidavit will go further and contractually prohibit the seller from soliciting or agreeing to any premeditation with any buyer on benefiting from the property. For example, an unrelated seller could approach the buyer about purchasing the property at a low cost, intending to use it as a multi-family rental property for extra income. The buyer might offer 20% of the future rental profits to the seller in exchange for a good deal on short sale. This type of deal is fraudulent and, according to the terms of the arm's length agreement, illegal.
Finally, no commission should be received by a buyer or a seller as a result of the sale. For example, the seller cannot pay a buyer to agree to the short sale, or vice versa. If you are unsure whether a potential buyer could violate the arm's length agreement, be sure to ask the bank.
Being as open as possible about buyer offers and backgrounds will ensure that you do not accidentally commit mortgage fraud by violating the terms of the affidavit. For more advice on signing this document, talk to resources like Iannello Anderson before you begin the short sale process.
