Home Selling in Arcadia>Question Details

Brian, Both Buyer and Seller in Arcadia, CA

Is a short sale to a relative considered fraud?

Asked by Brian, Arcadia, CA Sun Dec 14, 2008

My inlaws, caught up with the real state boom, bought a house two years ago they could not afford with a ARM loan. Now they can't afford the payments and have asked my wife and I if we would like to buy the house on a short sale. The inlaws would stay in the house and make all the payments until the housing market recovers.

I have feeling this might be illegal, but the agent my inlaws are working with assures me it will be fine. Can someone give me some information so I can "discuss" with that agent? Please note my wife is anxious to save her parent's house so I run the risk of alienating my wife and her entire family if I am not careful.

If the price the house is purchased is FMV, is it still considered fraud?

Help the community by answering this question:



Short sales are meant to help people avoid foreclosure by selling their home, when they have a true and confirmed hardship. They are not intended as a way to negotiate a loan modification. If your inlaws can afford a reasonable payment (it is understood they cannot afford the adjusted payment under their current loan) and want to stay in the home, then they should be working with their lender towards a loan modification and home retention. Lenders are very open to these types of negotiations at this time.

Now, as a direct answer to your question regarding short sales and fraud. Fraud is a legal issue and you should check with an attorney if you suspect something might be fraud. Just note, most lenders will not allow a short sale to a related party and/or will not allow the seller to remain in the home after the short sale process. These lenders will require that both the buyer and the seller sign affidavits of arms length transaction. Here is the wording from a recent document that my sellers and the buyers had to sign on an approved short sale:

"[Buyer and Seller] Hereby affirm that this is an “Arm’s Length Transaction”,

No party to this contract is a family member, business associate, or shares a business interest with the mortgagee. Further, there are no hidden terms or special understandings between the seller or buyer or their agents or Mortgagee.

The Buyers and Sellers nor their Agents have any agreements written or implied that will allow the Seller to remain in the property as renters or regain ownership of said property at anytime after the execution of this short sale transaction. None of the parties shall receive any proceeds from this transaction except the sales commission."

I would definitely advise that YOU check with an attorney if the short sale lender requires such an affidavit, before you sign such a document under the circumstances.

I am sorry to hear that your inlaws are in this position. They really should investigate a loan modification instead of trying to use the short sale system for something it was not meant to achieve. Loan modifications can be negotiated directly with the lender or with the help of an attorney. This, to me, appears to be the better way for them to save their home. Dare to Dream.

Shel-lee Davis
Real Estate Consultant
RE/MAX Palos Verdes Realty
5 votes Thank Flag Link Mon Dec 15, 2008
Yes, it is illegal.


Sheryl Arndt, Broker – Loan Officer
DRE# 01440252
NMLS# 297251
0 votes Thank Flag Link Tue Oct 23, 2012
Your feeling is correct. This is fraud as your in-laws plan on staying in the property. If your in-laws really want to stay they have 2 options: pay the mortgage or get a refinance to reduce their mortgage payments and pay those payments.

It is not your responsibility to save your wife's family. You should advise your wife's family to just sell the house and move into a more affordable house.

Good luck!

Arcadia Real Estate Expert
0 votes Thank Flag Link Thu Oct 11, 2012
can a non blood related relative by a short sale from the bank (no mortgage involved)
0 votes Thank Flag Link Mon Jul 23, 2012
can a non related blood relative buy a short sales from the bank in cash (no mortgage involved)?
0 votes Thank Flag Link Mon Jul 23, 2012
Shortt sales have to be an arms length transaction. This means the buyer cannot be related to the seller by blood or marriage.

Kawain Payne
0 votes Thank Flag Link Tue Apr 3, 2012
it has to arm length transaction and fully exposed to market. check out web link below for more info
0 votes Thank Flag Link Thu Jul 28, 2011
When a lender approves a short sale they will include language such as
The contract for the sale of the property is an arms length transaction, negotiated between the
customer(s) and the buyer(s) who are unrelated parties, with each party acting in their own self- interest.
The contract sales price is the fair market value of the property and is the result of fair bargaining.
The customer(s) warrants that they are not related to the buyer(s) of the transaction, by blood,
0 votes Thank Flag Link Tue Aug 17, 2010
Keith Sorem, Real Estate Pro in Glendale, CA
Hi Brian,

As always, hire your own real estate attorney to help you through this scenario ESPECIALLY since this is a transaction involving relatives. First of all, short sales MUST be arm's length transactions. This means the seller will be asked to sign something by the lender stating that they do not know or have any relationship with the buyers. Second, what happens if the inlaws don't want the house after the market recovers? Now you are stuck with it. Lastly, who says the housing market is going to recover in a couple of years? I see this question was posted in 2008. Looks like values are STILL dropping in California in some price ranges.
0 votes Thank Flag Link Mon Aug 16, 2010
The other day in my spam mail got a video from you tube & learned that short sales were here since the last 25 years. So i do not think illegal things will go on for soo long. & now they advertise short sales as better than buying from auctions, name your price. And the lender always ok's to the figures, agreeing to the short sale.
Web Reference: http://www.goforloanmod.com
0 votes Thank Flag Link Tue Dec 30, 2008
There is nothing illegal or even wrongful with a less than arms conveyance. Sale or otherwise. The problems we run into is for consideration versus intent. The transfer if excited by the current owners delinquency is a consqunece for not defrauding the beneficary and therefore not allowing the sale. Consideration is more important and will be called to a test. The IRS defines the rule and basically requires the consideration to be real and passing from one to another party. A new basis has to be established under the civil code for property taxes and a community property transfer is tough regrdless. A home purchased by a willing and able party bringing consideration to the table however is a valid sale at the appraised value. I said "party" and not relatives as in this instance so I would gauge the IRS rule is the best bet to argue not doing it. Also full full full disclosure is notice. Talk to a licensed Broker or counsel for guidance. Admin@borrowerhotline.com admin@borrowerhotline.com
0 votes Thank Flag Link Mon Dec 29, 2008

The information presented may or may not represent all of the pertinent information required to provide you with an opinion. Your best course of action, is to refer this sinerio to a real estate attorney for their input.

Good luck
0 votes Thank Flag Link Wed Dec 24, 2008
The lender has the final say in the acceptance of an offer on a short sale. If the inlaws put in an offer and it gets accepted there is nothing illegal taking place.
0 votes Thank Flag Link Wed Dec 24, 2008
Buy it as a non-owner occupied / investment property to avoid any issues because who you rent it out to afterwards is entirely up to you.

Good luck to you...
0 votes Thank Flag Link Mon Dec 15, 2008
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