How Can a Seller Get Paid from a Short Sale?
Understanding the Arms Length Addendum
The short answer is – you usually can’t. It is standard practice for the bank or “third party lender” to require the buyer, seller and all real estate agents involved in the transaction to sign an “Arms Length Addendum” at or prior to close. This document requires all parties to attest that there are no outside deals that would result in any benefit to the seller from the short sale transaction in a manner unbeknownst to the bank.
The bank is about to take a significant loss on their investment, and they do not want the sellers to be able to “game the system”. The Arms Length Addendum can vary from one bank to the next, but typically prohibits the following:
- • Selling the property to a relative
- • Selling the property to anyone with the intent of letting the original homeowner re-purchase the property as the buyer. Many banks now include a clause that also prevents the seller from being able to do a rent-back from the short sale buyer.
- • Any money going to the seller as a result of the sale
Keep in mind that any real estate transaction that involves payments of proceeds outside of closing that do not show up on the HUD-1 document are most likely in violation of federal laws. If something doesn’t "smell right", be careful.