Can I Short Sell My House To A Family Member?

The question of “is it possible to short sell my house to a family member?” is a common question. Most people who wish to short sell their house to a friend or relative only have good intentions in mind. However, because of various reasons, most of the time the banks will not allow it. Though, there are exceptions if the factors are right. In this article we explain why the banks do not allow you to short sell your house to a family member or friends, and when the exceptions to the rule apply.

Bank’s view On Short-Selling A House To A Family Member

First of all, banks are not fond of short sales. This is because short sales reflect a loss on the balance sheets. So whenever a bank approves a house for short sale, a lot of effort is put into it so it will be sold in the market at a competitive price. To ensure this, banks usually require short sales to have an “arm’s length” rule. This is the primary reason that prevents you from selling your house to a friend or family member.

Arm’s-length Transaction

An arm’s-length transaction is defined as an agreement involving individuals or parties with no special connection with each other. For example, the two parties must not be related; the two parties must not have any kind of business transaction outside the current transaction; the two parties do not have an undisclosed special agreement related to the current transaction.

Exceptions To The Rule

When you sell your house on a short sale, it is common for banks include an arm’s-length rule. However, there is nothing stopping you from asking the bank if your situation has a possibility of an exception. In fact, you have nothing to lose if you ask the bank for one.

In reality, the bank is not concerned who is buying your real estate, whether they are a family member, friend, investor or agent. The only thing that the bank is interested is getting the best price for your house, preferably above the market price as this will be beneficial for them.

It is possible for the bank to allow the short sale of your property to a family member

It is possible for the bank to allow the short sale of your property to a family member if you can prove, through appraisal or proper documents, that your family member who wants to purchase the property is paying a competitive price or above the price of other interested parties. By going the extra mile, you’ll demonstrate to the bank that they are getting the best deal possible.

One of the major reasons why a relative wants to short sale a house to a friend or relative is because they do not want the current relative who is residing in the house to move out. In such cases, it’s possible for the relative the rent or purchase another house in the same neighborhood if a short sale is not possible. The kids would still be able to go to the same school and remain in the same neighborhood. The process of moving would be relatively easy. Also, any plans of arrangements on the current property, whether long-term ownership or rent, may be applied to the new house.

Importance Of Following The Rules

In most circles, if you short sale your house that comes with an arm’s length rule to a friend or relative, then it is considered short sale fraud. The responsibility of scrutinizing a short sale for a possible fraud falls on the Federal National Mortgage Association. The seller is usually required by the bank to sign an agreement that he/she is not related or associated with the buyer. This agreement is considered as a legal and binding agreement, thus it is subject to legal scrutiny. If the seller signs the agreement and continues with a short sale to a friend or relative, then the seller may be legally charged with breach of contract or fraud.

Reasons For The Arm-length rule

As mentioned before, most parties that are interested in short selling a property to a friend or relative only have good intentions in mind. It could be that they don’t want their friend or relative to move out of the house. However, you must also take into consideration the bank’s position. Aside from the reason of getting a competitive price for the house, and arm’s-length rule is applied as a means of curbing mortgage fraud.

What the banks are trying to avoid is the seller profiting from the transaction while they are having a loss on their balance sheet. To elaborate, the seller makes an undisclosed agreement with a friend or relative, who is going to purchase a house. After the transaction, the buyer will then transfer the title back to the seller. In such situation, the purchasing party is nothing more than a “straw buyer”.

To look at it at a different perspective, the original seller just repurchased the property at a significantly lower price. This will greatly benefit the seller, and banks do not like this idea. Most of the time, the banks considered this as a win-loss situation, and they are on the losing side. Most banks are not fond of allowing the short-sale seller to benefit from the transaction. If they did want the seller to benefit, then they would have approved a loan modification in the first place.

Arm’s-length Affidavit Specifics

It is typical for banks to create their own arm’s-length affidavits. As a result, the specifics may vary from one bank to another. However, there are common points in most arm’s-length affidavits. Below are a few of them:

• Includes names of the agents, buyers and sellers
• Includes the property address
• All parties related to the short sale contract must not be a business associate or family member.
• No special agreements or special terms made by the seller, buyer and/or agents.

These are only a few of the common denominators of most arm’s-length affidavits. If you want to know more about the exact details of the short sale, then it’s best that you talk to your bank or lender.

In summary, the short answer to the question “can I short sell my house to a family member?” is no. The reason being is that banks usually include an arm’s-length transaction to a short sale contract which makes short selling to a family member illegal. The reason why banks do this is to prevent the seller from benefiting from the transaction or curbing mortgage fraud. However, exceptions do exist and you have nothing to lose if you ask the bank for one.