In what situations is a short sale then buy back legitimate?

June 1, 2011 9:16 AM

Short sale, then buy back?

Asking for a friend.

Pertinent Details:

• They're underwater on their mortgage.
• Friend is a woman, currently going through divorce, lives in the house with their two daughters.
• Husband is sole signatory on current mortgage, has moved out of the house, & stopped making mortgage payments in January.
• The only place where friend 'signed' was on line of credit account when the house was refinanced a couple years ago. She was not a signatory on the new mortgage per se. Her name is on the deed.
• An acquaintance has agreed to buy the house as a short sale, and then re-sell it back to my friend in two years, for a profit of course.

The question: How likely is it that the bank would allow the sale back to my friend in two years? She knows her husband trying to buy it back would be fraud & unlikely to happen. But, what about her?

She's having a difficult time getting a realtor to weigh in on the legality of the future sale back.

She's in Michigan, and if you could recommend a realtor or real estate lawyer in the Detroit area that deals with things like this, bonus!

Thank you.

posted by anonymous to Law & Government (3 answers total)

I'm in CT and currently selling my house as a short sale. As part of that, the buyers and myself had to sign something called and "Arm's Length Affadavit". This is what it says:

"No party to this contract is a family member, business associate or shares a business interest with the mortgagor. Furthermore, there are no hidden terms or special understandings between the mortgager, buyer and/or their respective agents.

Said parties do not have any agreements written or implied that will allow the seller to remain in the property as renters or regain ownership of the property at any time after the execution of this transaction. None of the parties shall receive any proceeds from this transaction except the sales commission as approved by the lender."

Not sure what would happen if this was violated. Maybe you can google it and find information specific to your state.

I hope this helps!
posted by SheIsMighty at 9:27 AM on June 1, 2011 [2 favorites]

In theory this is criminal fraud. The bank allows the short sale on the basis that the borrower has no other options. If the borrower has the option of later affording the house at the lower price, they have eliminated debt and retained the asset. This should only be possible through the bankruptcy courts.

It really doesn't matter, and is fairly common, that the name on the mortgage does not precisely match the name on the deed (for example, a house may be quit claimed to a relative to avoid probate). The house is security on the mortgage.

If your friend cannot afford the current mortgage, she will need a mortgage modification (lucky if you can get one) either through HAMP or an in-house plan, or she'll need to pursue bankruptcy. In Chapter 13 she can pay off any arrearages on the mortgage and keep the house, if she can do so within five years.

This is, most definitely, a case where a lawyer is necessary to lay out the options and make sure the proper procedures are followed. IANAL but I feel your friend is entertaining a dangerous notion that could expose her to civil lawsuit and potential criminal prosecution.
posted by dhartung at 9:54 AM on June 1, 2011

Yeah, this seems like a really bad idea. If the bank overseeing the short sale gets wind of it, they could easily come after your friend for damages (whatever loss they took from the short sale, plus attorney fees, etc.), and dhartung is right--it's probably fraud, especially if there's an Arm's-Length Affidavit. The fact that her name wasn't on the mortgage doesn't change the fact that she's colluding with a friend to profit at the bank's expense (and no realtor with an ounce of sense would tell her otherwise, so she's probably not going to get very far on that path).

Even if all of that weren't true, how would she be planning to finance the re-purchase? A short sale will wreck her credit for the next seven years, so unless she's going to pay cash, she probably won't qualify for a mortgage in the first place.
posted by Mayor West at 11:46 AM on June 1, 2011