The short sale is the last resort for a homeowner or family who are so far behind on their mortgage, they don’t see a way out. In this procedure, the homeowner will put their home for sale on the market, to quickly sell their house if they are facing foreclosure, because they are behind on their mortgage payments, and can’t work out an agreement with their lender. Because a short sale typically means a major loss to your lender, they won’t allow the transaction to occur, unless of course it is a cheaper alternative than the foreclosure. If they approve the short sale, it will count against the mortgage payments which were missed, and settle the mortgage owed on the home. But, what are the rules governing a short sale; in particular, can the sale occur between family members?

The arm’s length rule

One of the rules which avoids the potential of family members purchasing a home in a short sale situation is the arm’s length rule. It basically states that two individuals who are associated, can’t purchase the property. A secret transaction involving the sale can’t be agreed upon, nor can the parties work jointly outside of this sale.

Why is the rule in place? Fraud. Lenders are afraid of fraudulent sales taking place, where they will be at an even greater loss.

Short Selling to your family sounds like a good idea, until you read the fine print…

Flipping the property, renting the property out, or purchasing for a lower price, then reselling to the original owner, are only a few forms of fraud that can occur. For this reason, in most short sale situations, this rule governs the terms of the sale, along with other rules preventing family members or acquaintances from purchasing the home.

Are exemptions in place?

It never hurts to ask the lender to place an exemption on the arm’s length rule. But, does it happen often? The answer is no. Even in today’s up and down market, there are willing and able buyers who will purchase a short sale property.

So, lenders are weary of allowing the exemption, even if you can convince them the sale to a family member is the highest possible offer they are going to receive on the home. If you can however show documented offers which have been lower than what your family member is willing to pay, along with proof of sale of similar properties in the area, and if the short sale process has taken more than a few months to close, a lender might reconsider allowing the exemption on the sale. More often than not they won’t allow it, but depending on current market trends, and other offers which have come in, certain lenders will eventually cave, and allow the sale between family members to occur.

Know your options

If you can prove certain hardships (illness, job loss or relocation, divorce, etc), giving just cause for the short sale transaction to be approved by your lender, it is important to know your options in terms of who can and who can’t purchase the property. Especially if you have a family member who is interested in purchasing the home, showing just cause as to why they should be allowed to purchase the home (for example, they are willing to purchase a home in the same neighborhood, for market value), is in your best interest to complete the transaction as quickly as possible, and to remove the burden of finding a buyer for the short sale property. Not only will it allow you to eliminate the burden of having to find a viable buyer, which the lender is willing to accept the offer on the home, it will also help avoid the legal ramifications which come along with a foreclosure sale, a looming bankruptcy proceeding, and other legal ramifications and potential costs. We are expert investors that are experienced in helping stop foreclosures.

Although it is generally frowned upon, and in most cases will never occur, it is not against the law to sell your short sale property to a family member, if the lender agrees to the exemption of the arm’s length law. For those who are in this situation, and have a family member who is willing to buy the property, make sure you do your research on at least one of these home valuation sites, present all viable facts, and request the exemptions early in the process, if you truly believe the sale is valid and legal.