Short-sale type transactions seem to be the norm these days but there is a caveat. Most of the time, the lender involved with the short sale will require an Arms-Length Transaction Affidavit to be signed at closing – which basically says that anybody even slightly related to the seller cannot buy the home.
Why is it required? To prevent the seller from selling the home to a friend, relative, boss, ex-spouse , etc., buy it at a lower price, get a new mortgage with a lower loan amount, then live there and/or buy it back at a later date!
Where you get hung up on this type of transaction is at the closing table. The buyer and seller will be signing this affidavit that basically says, and I quote:
No part to this contract involves a family member, friend, business associate/ shares a business interest (1) with the mortgagee. Further, there are no hidden terms or special understanding between the buyer or seller or their agents or the mortgagee (2) that are written or implied that will allow the sellers to remain in the property as a renter (3) or ever regain ownership of said property(4) at any time after the execution of this short sale transactions. None of the parties shall receive any proceeds from this transaction, except the sales commission (5).
(1) Means no friend, relative, acquaintance, spouse (ex), grandparent, brother-in-law, adoptive parent…NO ONE YOU KNOW…period
(2) Like money, kickbacks, gifts, trips, ANYTHING
(3) Everyone who occupies the house now must move out and NEVER EVER move back in again.
(4) Seller cannot buy it back at a later date, be added to the title or live there EVER
(5) No funds, gifts, trips, exchange for services…NO MATTER WHAT
Signing your name on it, as the real estate agent, says that you understand and if you have any knowledge that this is NOT an Arms-Length deal, it’s considered fraud. So if you discover that the buyers and seller know each other — even if it’s a cash deal, cancel the deal. It’s not worth it!
Amber Sky Mortgage Solutions Blog 