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Affidavit of Arms Length Transaction – What Is It?

By
Real Estate Broker/Owner with Daytona Condo Realty, 386-405-4408

I am getting close to closing on a short sale where I have never seen the buyer, and I have never seen the Seller. The lender sent us the Affidavit of Arm’s Length transaction. I signed for me and sent to both the Seller and the Buyer.

The buyer called me next morning. What the heck was that? I told him about relationship between the Buyer and Seller, and me as the agent. He was OK with that. He did  not have a slightest idea who the Seller was anyway.

But he is an investor. He would sell it when he can get the profit he is looking for. It can happen 2 years from now, it can happen 5 years from now, it can happen 6 months from now (though unlikely). He asked me that would he need to do investigation to see that the future buyer is not the Seller, nor his relatives or business associates.

How can he do it?

And I started thinking about it. And I do not know how actually this works, how it is enforced..

What do we all do when we do not know something. We either go to Active Rain, or you go to Google. So, I Googled it, and the first article I ran into (Why Does the Bank Require an Arms-Length Affidavit on a Short Sale?) explained that if the Seller later repurchases the property, this could constitute mortgage fraud, and it will be in the jurisdiction of FBI.

FBI - Jon Zolsky blogI liked the article and looked who the author was. Pleasant surprise, it was one of my AR favorite bloggers Elizabeth Weintraub, the short sale guru from Sacramento, and the article was posted on About.com. (Elizabeth – hint, need an autograph, please).

Done with the question? Not quite. Am I correct assuming that it is not the problem for the buyer, who may inadvertently sell later to the Seller or members of his family for as long as s/he has not conspired to commit the mortgage fraud. The Buyer should not be liable, should s/he?

And another question. The idea is to prevent the Seller from profiting from short sale. So, let’s assume that the Seller, who purchased the property for 500K ($150K down and $350K mortgage), and then sold it as short sale for $250K, comes in 3 years and buys the same property for $400K. Does he make any profit? And if not, would he still have a problem with FBI?

William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Jon,

I don't see the relevance?

But, any thing can happen!

You can't contract against every thing.

It's the risk we take dealing with people!

We could work if a factory, but machines break.

Bill

Jun 04, 2010 12:25 PM
Andrea Swiedler
Berkshire Hathaway HomeServices New England Properties - New Milford, CT
Realtor, Southern Litchfield County CT

Jon, I have thought about this very thing for a different reason, something we are seeing here. I think that it is more about a family member or someone they may have a business relationship with. For instance, he is under water, needs to get out, has a business partner who will buy it as a short sale and sell it back to him at the very same price. Or... a family member gets a deal, or someone who is not at arms lenght makes a profit off the sale somehow. I don't believe you can worry about down the road, unless it is pre planned.

Jun 04, 2010 02:31 PM
Broker Nick
South Florida Real Estate & Development, Inc. - Coconut Creek, FL
Broker Nick Relocation Broker Service

Jon - Another one of governmental and banking regulations that just wasn't thought out well enough before making it mandatory - makes no sense to the future transaction - just for the present.

Jun 05, 2010 01:36 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Bill - not really, except for that the agent in 7 months ran into a trouble, as he forgot the name of that lady, a member of the family.

My buyers concern was merely whether he has to investigate or not. Arms length agreement when he is going to be swelling will pertain to hi as the seller and the new buyer, not the previous seller.

Jun 05, 2010 06:08 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Andrea - I understand the notion, but there are legitimate questions. the guy is short selling his home, as he can't afford the payments any more. Can he sell it to his x-wife? Is she a relative in the eyes of the bank?

The holding company buys a property on a short sale. The seller than turns and buys the holding company. Would it be against the law? he is not buying a property, he is buying a company, but the only holding for that company is this property.

It is not a matter whether it si nice, it is a matter whether it is legal. What do i, as agent, supposed to do?

Jun 05, 2010 06:15 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Nicholas - I think it could be better if they would have set the time limit. Not owning it for 5 years, for example. I think this would be easier rather than base it on the notion of profit, because the Affidavit does say that the seller can't profit from the transaction, and also that that the Seller will not rent, stay or come back there, and that has no time limitations.

So, how can you tell no to a person who cam in 10 years and bought it for a fir market price?

Jun 05, 2010 06:17 AM
Elizabeth Weintraub Sacramento Broker
Elizabeth Anne Weintraub, Broker - Sacramento, CA
Put 40 years of experience to work for you

Hey Jon, thanks for the plug. I think the intent of the bank is to prevent the seller from buying that home. Probably forever. It depends on the language in the affidavit. If the seller thinks he or she might want to buy that home in the future, then the seller probably should not sign the arms length affidavit. Of course, if the seller refuses to sign the affidavit, the lender won't approve the short sale.

Jun 05, 2010 06:35 AM
Kristen Correa, Broker
Kristen Correa Real Estate & Reedy Creek Realty Services - Keller, TX
I love coffee & real estate. I am out of coffee!

That's a lot of analysis, there. Sounds like you need to ask the attorney who drew that one up! I have always signed the arm's length forms with little question due to I supposed I would be more likely to be struck by lightning.

Jun 05, 2010 06:43 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Elizabeth - I agree, I understand the intent of the Bank. In general all is fine. When you start looking at details (like Seller then buying a company that owns it - and I just made up this scenario, but theoretically it may be, so then he buys the company, annd not the property, so legally would it be against of the signed affidavit.

I understand that this and, I assume, other situations may exist, so will the legality change here?

I have a short seller that signed the Affidavit. However, when the buyer came to see the property a couple of times at the contract stage, he met the seller and they are now seeing each other. What if he marries her in a year? She can't then be there with her husband (again, at this point it is hypothetical)?

Jun 05, 2010 07:04 AM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Jon, looks like this would be an excellent question for Richard Zaretsky. I can see banks investigating this in the future when a property sells that was a short sale or foreclosure in the past, just to be sure the buyer isn't a former seller. Another affidavit....

Jun 05, 2010 03:49 PM
William Johnson
Retired - La Jolla, CA
Retired

Hi Jon, Perhaps we will have a new form or incorporated in an existing form where the Buyer must state if he/she ever had an interest holding in the subject property before. If so they would need to declare what that interest was and how it was reconciled. Certainly an interesting question that might re-appear before too long.

Jun 05, 2010 05:45 PM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Sharon - an excellent suggestion. I actually thought about the whole thing and wrote another post, and came with three scenarios that I could think of, and i sent a link to Richard and Ken Lawson.

Jun 05, 2010 05:53 PM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Kristen - sometimes you need to make sure you ARE NOT going to be struck with lightning (LOL)

Jun 05, 2010 05:55 PM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

William - Hmm, actually a very logical and excellent suggestion. Of course, so far I do not see it, but this would be the easiest way to go

Thanks

Jun 05, 2010 05:56 PM
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Just have the buyer keep a copy of the form.  Then when he goes to sell the property pull the document out and make sure the person across the table isn't the same person on that form. Not too difficult.

Jun 08, 2010 02:47 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Rob - it is a good suggestion. I also tend to think that the Buyer should not be under fire for as long as there are no behind the back arrangements. It is the Seller's problem to stay away

Jun 08, 2010 10:20 AM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Coldwell Banker Realty

Short Sale Buyers and Sellers who ignore the Arms Length requirements risk legal consequences - both criminal and civil.

Dec 15, 2010 12:11 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Tony - the way they are written the enforcement across the board is very unlikely. It sounds like a weak document, more of a scare, than something that can stand in court,

But who wants to get to court?

Dec 15, 2010 06:45 AM
Anonymous
LARRY OLIVER

Desperatly need a copy of the Bank of America's "Affidavit of Arms Length Transaction.  Have Court in 15 day from Jan 31 2011.  I need to nail a Short Sale Fraud with the party on the witness stand.  HELP

Larry Oliver

Real Estate Broker

661-665-0000

Jan 28, 2011 02:46 PM
#21
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Larry, I will check my files. However, suggestion: go to http://shortsalesuperstars.com/ and find the group Bank of America and ask members. It may be the best bet

Jan 28, 2011 04:20 PM