Banks in general are not big fans of short sales. This is because these short sales result in a loss on the sheets of the bank. Thus, if at all a bank approves a short sale; it makes sure that the home is being sold at a competitive price. In order to do so, the bank can require that the transaction be maintained at arm’s length. Such a rule prevents a family member from buying the home.
An arm’s length transaction can be best defined as an agreement made between two or more parties with no special relationship with each other. Thus, if the parties are unrelated, they will not indulge in business that is not related to the transactions they are to make.
Mortgage lenders like banks use this law to prevent short sale fraud and similarly, short sale between relatives. The parties involved in the transaction together with their real estate agents have to sign this affidavit. If they provide any information that is false in the affidavit, it can compromise the whole transaction.
Short sale home sellers can also not be related because of issues to do with property flipping. This is whereby one buys property for a given price and then sells it quickly at a higher price. Let’s say you have sold your home to a close relative of yours and your lender has written off the loss. Once the loss has been written off, you and the relative you sold it to can resell it at a higher price and take home some profit.
There is no specific law that goes against short selling your home as a way to sell it in a short period of time to a relative. You could still end up breaking the law though. If you short sell your house and you lender suspects that there is collusion between you and the buyer, it can file a lawsuit against you for criminal fraud. In addition, any mortgage lender will assume that a short sale to a relative is intended to give the relative a break in the price. Various lenders may have a different definition of what a family constitutes in a short sale.
You can ask your lender to make an exception to the arm’s length rule for you. It will not cost you anything and you have nothing to lose by doing so. The bank might not care who buys the property, so long as the price you sell it by is the best in the market. If you can prove to the lender that all the other offers are below what your relative has offered, then the bank might allow a sale. By doing this, you show the lender that the home is being sold at the highest possible price in the market.
A major reason why a person may chose to short sell his or her house to a relative is if he or she does not want someone who lives in the house to have to move out. To solve such an issue, you can choose to have the relative buy another home in the neighborhood thus solving your problem.