Risks of Short Sale "Arms-Length" Addenda

Real Estate Broker/Owner with Focus Point Properties BR578571000

GREAT advice from K. Michelle Lind, Arizona Association of Realtors General Counsel

I know that as Broker, I get very nervous when signing these documents, but there is no other way to get the deal done, its non negotiable... according to the lenders.  I really hope the NAR makes some headway on this matter.


Due to increasing concerns about short sale fraud, Freddie Mac and other lender/servicers are now requiring the listing broker, the buyer’s broker and the escrow agent to sign an affidavit or addendum to the contract attesting that the transaction is “arms-length,” in other words, that all parties are unrelated by family or commercial enterprise and there are no undisclosed side agreements.


Although avoiding fraudulent transactions is an important goal, some of these affidavits and addenda impose unreasonable risks on the brokers and agents involved and survive close of escrow. Making the brokers a party to the contract by way of an addendum creates unintended consequences in litigation matters. Liability created by joint and several liability and indemnity clauses, which make each signatory liable for the misrepresentation of any other – even if unknown, creates risks that may not be covered by E&O insurance.


AAR is working with the National Association of REALTORS® (“NAR”) to address these issues. AAR contributed to a letter of concern that NAR sent to Freddie Mac last month and is now collecting information to assist in further efforts. In the meantime, carefully review any affidavit/addendum that you are asked to sign and discuss the risks of signing any such affidavit/addendum with your broker.


K. Michelle Lind, Esq. is General Counsel/Assistant CEO to the Arizona Association of REALTORS® (AAR). She serves as the primary legal advisor to the association. Michelle oversees AAR’s Risk Management Committee, which includes professional standards administration for twenty of the state’s local REALTOR® associations, and the development of standard real estate forms. She is the author of Arizona Real Estate: A Professional’s Guide to Law & Practice and a regular contributor to the Arizona REALTOR® Magazine and the Arizona Journal of Real Estate & Business.
Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.

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