Banks don't really like short sales. After all, they result in a loss on the bank's balance sheets. So when a bank approves a short sale, it makes sure the home is being sold at a competitive price on the open market. One of the rules banks employ to make sure this happens is by requiring the sale to be an "arm's length" transaction. This rule prevents a family member from buying the house.
Arm's Length Rules
An arm's length transaction is an agreement made by two or more parties who do not have a special relationship with each other. For instance, the parties are not related; they do not conduct business together that is unrelated to the transaction at hand; they do not have an undisclosed side deal related to the transaction.
Ask About Exceptions
You have nothing to lose by asking your lender to make an exception to the arm's length rule. The bank probably doesn't really care who buys the property; it cares the accepted price is the best price the market has to offer. If you offer to pay for the lender to appraise the property and document that other offers have been below the price your relatives have offered, the bank might be able to allow a sale to a relative. These steps will demonstrate to the lender the property is being sold for the highest price the market can bear.
If you have a relative willing to buy your house through a short sale, maybe the same relative would be willing to buy another house on the market in the same neighborhood which you could rent. Your kids could remain in their neighborhood and school. Moving would be relatively easy. And whatever arrangements for rent or long-term ownership you were planning for your existing house you could apply to the new house.
Follow the Rules
In some circles, completing a business transaction that is not at arm's length is considered fraud. The Federal National Mortgage Association looks upon any purchase offer by a related party as characteristic of fraud if not actual fraud. Many lenders will require the seller to sign a statement at closing verifying they are not related to or do not know the buyer. Following through on the sale in contradiction to the signed agreements between seller and lender may result in a charge of fraud or a breach of contract.
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