How do the lender check to see if you are related in a short sale?

Asked by Betty Boo, Arcadia, CA Wed Aug 24, 2011

My sister is losing her home. I am willing to buy it but their is a rule about relatives buying it in a short sale. My son is also willing to buy it. How far back do they check? I don't want to lose the property. It is heir property in Louisiana.

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Steven Ornellas’ answer
Steven Ornel…, Agent, Fremont, CA
Wed Aug 24, 2011
Betty Boo:

Personally, I would talk to a RE Lawyer on how you might structure a “family financing agreement” on how to keep your sister’s home and keep the property current on its existing mortgage.

In a Short Sale the Lender(s) require an "Affidavit of Arm's Length Transaction". An example of the text is as follows:


Including the Seller, the property may not be sold to anyone the seller has a close personal or business relationship with including family, friends, or in some cases, even neighbors. Expect the probability of an exception to this rule to be extremely low and hovering just above non-existent!

While Short Sales have increased as a remedy for distressed sellers (Freddie Mac short sales have raised from about 4%of completed workouts in 2000 to nearly 14% in 2010) Short Sale fraud has also increased leading lenders to be more vigilant. As an example, my last Short Sale required that both the Selling Agent and Listing Agent sign the "Affidavit of Arm's Length Transaction". Loan officers are also now being asked to sign these.

Here’s a few example of Short Sale Fraud that has been taking place (from the Freddie Mac website):

1) Falsely indicating on a new short sale listing that there is an offer on a property in order to discourage legitimate offers and protect an accomplice’s planned low bid.

2) Manipulating the short sale listing price by making the house look more distressed than it really is (“reverse staging”), inflating repair estimates, or using similar tactics designed to obtain an artificially low home value on the Broker Price Opinion. (Our requirements prohibit the buyer, buyer’s agent, buyer’s attorney, or a third-party short sale negotiator to be the contact point for the agents preparing the BPO.)

3) “Flipping” schemes where the fraudster “buys” a house at a short sale without putting down any of his own money and then sells it a few hours (or days) later to a legitimate buyer at a much higher price. These are complex multi-step schemes that use falsified title and/or loan documents to fool a lender into approving the ultimate buyer’s mortgage, which the fraudster uses to settle the earlier closing on the house he “acquired” at the short sale for a much lower price.

4) Manipulating the HUD-1 settlement statement so the fraudster can skim away net proceeds from the sale for himself or other parties in the transaction without the seller’s or investor’s knowledge. (The HUD-1 is the document that itemizes all fees, charges, and other funds involved in a home sale.)
[End Quote]

Again, speak with a Louisiana RE lawyer regarding options as Louisiana is unique among the 50 U.S. states in having a legal system partially based on French and Spanish codes and ultimately Roman law, as opposed to English common law.

Best, Steve
1 vote
Joan Lorberb…, Agent, Boca Raton, FL
Thu Sep 1, 2011
With apology to Wm. F. Shakespeare . . . A relative by any other name would still be a relative.
If one lies on the "Affidavit of Arm's Length Transaction" then that party is committing fraud.
0 votes
Sue Wylie, Agent, South Burlington, VT
Wed Aug 24, 2011
You should talk with a real estate attorney. I have seen it done when the buyer sets up an LLC - Limited Liability Corporation and the corporation buys the property. You might also find a "straw" buyer. that is someone who is Not related to the seller, who is willing to hold title for a time. This needs expert legal advice to do it. It would be a shame to lose a family property, so explore all options. You should also look at whether you can catch up on the mortgage - make a deal with the bank and in your sister;s name continue to pay on the mortgage. Your sister can also use bankruptcy to forestall a foreclosure on the property.
There are many options available, seek out a good local real estate attorney who can help you save the property.
0 votes
Shanna Rogers, Agent, Murrieta, CA
Wed Aug 24, 2011
Hi Betty Boo,

Most, if not all, lenders have all parties involved in a Short Sale sign paperwork that it is an 'Arms Length' transaction. If all parties sign and this is NOT the case (Arms Length), it is considered Fraud. Does your sisiter (and other possible parties) want to be involved in Fraud and all that it entails - possible fines and prison time?

Shanna Rogers
SR Realty
0 votes
Anna M Brocco, Agent, Williston Park, NY
Wed Aug 24, 2011
Consult with an attorney who specializes in real estate before considering the purchase; he/she will best advise as to your options, if any....
0 votes
Eli Givoni-S…, , Boca Raton, FL
Wed Aug 24, 2011
Many banks will typically make the buyer and seller sign an Arms Length Transaction form, stating there is no relationship between them, not even a business relationship. Feel free to call with any questions.

Eli Givoni, Director
Short Sale Department, LLC
Serving all 50 states

MARS Disclosure for General Commercial Communications
Short Sale Department, LLC is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit.
0 votes
John Arendsen, Agent, Leucadia, CA
Wed Aug 24, 2011
Betty Boo, Sorry to hear about your plight. However, the very nature of your question subjects a RE professional to scrutiny by governing bodies should they answer. We as professionals can't really advise you as to how you can subvert law and policy. Should any RE professional do so they would be sliding down a very slippery slope.
0 votes
Eric J Soder…, , Pleasanton, CA
Wed Aug 24, 2011
Hi Betty,

I am sorry to hear about your sons situation.The answers below are all correct. I will add that if your realtor knows that this is not an arms length transaction he or she should refuse to continue the transaction. If they do not know or decide to continue even though they are aware of the situation, you may be putting them into a legal situation that could cost them money and or their license. Look at all of the options. Go speak to a real estate attorney immediately. Time is crucial in these situations. Below is a link to short sale information that I have made available. I hope it is of value to you.

Best Regards,

Eric Soderlund
0 votes
Lauryn Eadie, Agent, Reston, VA
Wed Aug 24, 2011
As part of a short sale, most recently I have had banks ask for the buyers social security numbers. This is to verify if there is any relationship. Most banks: i.e: bank of america, wells etc also ask all parties to sign an addendum called "An arms length transaction addendum". This is a legal document it and if you sign it and the bank finds out you are related you would have serious legal issues including charges of fraud.

I would be VERY careful in proceeding. I understand and respect your efforts to help, but tread carefully.
I am not sure how far back they will look in terms of the family tree and where the cut off line is. Something you also need to consider, if you are purchasing the home so that your sister can remain in the property, be careful what you sign because as part of that addendum "the arms length transaction" you will be agreeing NOT to rent the property back to the current owner i.e. your sister. So even if you could buy it, whether it is a family friend (unrelated) or not, your sister will likely not be able to remain in the home per the bank addendums.
0 votes
Shane Milne, Mortgage Broker Or Lender, South Jordan, UT
Wed Aug 24, 2011
A: How do the lender check to see if you are related in a short sale?
Q: By the seller signing an affidavit that says they are not related to the buyer. There may even be one that the buyer signs as well.

My question to you is... do you, your sister or your son want to get into legal trouble?
0 votes
Joe Cusumano, Agent, Riverside, CA
Wed Aug 24, 2011
The bank verifies by last name. It is really hard for them to verify it any other way.
0 votes
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