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We are planning to buy my mom's house as short sale because it's underwater? Is it possible?

Is it possible for me and my husband to buy it and make it 30 years terms? We were advised not to do it due to some law and that if we get audited, we will loose the house and our credits will be ruined. Will really appreciate a response. The house is in the city of torrance.
  • October 21 2013 - US
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Answers (8)

We kinda made it complex at the end, here.

No, Jacque, you cannot buy your mother-in-law's house at a short sale. The lender will not approve a short sale if a relative is the buyer.

All the best,
  • October 21 2013
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Profile picture for SoCal Engr
"Actually it's my mother-in-law's and she is planning to retire within 5-10 years from now...Is there really no way we can take on the house when she retires or maybe before that? We really want to keep the house because it is in a good area and good city, instead of her leaving it when she retires to another country."

Given the above, it does not sound like there is any immediate urgency? If there is no immediate/urgent driver in this scenario, what are the chances of taking a longer-view on the transaction?

You say your MIL is looking at 5-10 years before retiring. What's the local market look like? What are the chances the house will regain value and no longer be upside down? If your MIL were to sell to you, where would she live until she retires?

It sounds like there may be other options available to you than pursuing a short sale in-the-here-and-now. But, even though you like the house, you should look long-and-hard at the value-v-market, as there is no way you are going to get the house via short sale.
  • October 21 2013
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Profile picture for SoCal Engr
There are two pieces to the answer to your question.

The first is the notion of "arms length transaction" in a short sale. Essentially, this is a lender requirement to make sure that the seller is not benefiting monetarily from the short sale. You can read more about the concept, and why it is enforced by lenders, here. The short version is the seller has to state that they are not selling to a relative, a business associate, or anyone else with whom they have a prior agreement on the disposition of the property.
 
I found no California law specifically addressing "arms length transaction". But, California Code 532f, which you can read here. The applicable text is copied below. The short version is, you run afoul of 532f when you fill out the "Arms Length Affidavit" and don't disclose the personal relationship between the seller and buyer.

"532f.  (a) A person commits mortgage fraud if, with the intent to defraud, the person does any of the following:
   (1) Deliberately makes any misstatement, misrepresentation, or omission during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process.
   (2) Deliberately uses or facilitates the use of any misstatement, misrepresentation, or omission, knowing the same to contain a misstatement, misrepresentation, or omission, during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process."
  • October 21 2013
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Here's the language from a Wells Fargo arms length affidavit (link to document).

"The sale of the (home) is an 'arms length transaction between parties who are unrelated or unaffiliated by family, marriage or commercial enterprise'.

In other words, you can't be related to, married to, or involved in a business relationship with the buyer.

The attached document is pretty much what everyone uses, so whatever lender owns the mortgage will probably use this form.
  • October 21 2013
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Profile picture for jacque1016
@Michael Emery What is an 'arms length'?
  • October 21 2013
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@Bryan Mecsey Actually it's my mother-in-law's and she is planning to retire within 5-10 years from now and she feels bad in loosing the house so she was thinking to short sale it to us. If ever, this will be me and my husband's first house. Will it still be considered bail out? Is there really no way we can take on the house when she retires or maybe before that? We really want to keep the house because it is in a good area and good city, instead of her leaving it when she retires to another country.
  • October 21 2013
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Most lenders require the transaction to be 'arms length'. This will often exclude close relatives from purchasing the home. You will often also have to sign an 'arms length affidavit' (a legally binding document) to prove there is no attempt at mortgage fraud.

If the lender would agree to waiving the arms length affidavit, this would be only opportunity to buy the home and avoid mortgage fraud.
  • October 21 2013
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Unfortunately, this will be viewed as a bailout situation.  Since you know the seller, they will not be able to short sell the home to you two.
  • October 21 2013
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