Arm’s length transactions and short sales

What is an arm’s length transaction?

According to the National Association of Realtors®, an arm’s length transaction is a real estate transaction “in which the buyers and sellers act independently and have no relationship to each other. The concept of an arm’s length transaction is to ensure that both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party.”

When it comes to short sales, agents, buyers, and sellers frequently have questions about the structure of the short sale transaction. An agent may want to know whether she (or he) can represent a child, sibling or other relative in the short sale of a home. Other buyers and sellers may want to purchase the home of a friend of relative when the property is listed as a short sale.

Almost every short sale lender or servicer (including Fannie Mae and Freddie Mac) has a zero tolerance policy when it comes to non-arm’s length transactions. In fact, many of these lenders require all parties (including both the listing and selling agents) to sign an Affidavit of Arm’s Length prior to approving (or even processing) the short sale transaction.

Bad Things Can Happen

I received a phone call the other day from a Broker who had a fully approved short sale at one of the major lending institutions. He needed a few extra days to close the transaction. And, when he called the bank to ask for the extension, he learned his short sale had been declined. Why? Well it turns out that the Broker was the buyer and he was being represented by an agent in his office. The servicing company and the investor were having nothing of it, and denied the short sale outright.

This individual had signed an arm’s length affidavit. However, whether he actually read before he signed is something that I am still curious about.

Moral of the story: carefully consider the relationships between and among all of the parties of the short sale transaction before moving forward. And, of course, read everything carefully before signing on the dotted line.