Possible Short Sales Scenario? Armslength, Seller eval?

Question

Looking for the BP community's feedback on a couple topics in the short sale process, specifically related to a property I'm working through.

Here is a little context to the situation.  Seller is my father (please continue reading).  Property was refinanced in 2007.  Property is the seller's second home which has been mostly vacant for the past 7 years.  The mortgage payment has not been missed in those 7 years.  Property condition is not move-in ready.   Needs a pretty decent rehab ($50K) to get back to market value.

• Intent vs. legality of arms length disclosureMy understanding is that the intent of the disclosure is to avoid mortgage fraud by allowing a related party to purchase the home at a deep discount then reselling or renting the property back to the original seller.The affidavit is not only a disclosure of information but prohibits the buyer to be of relation to the seller.The intent of my purchase will not include the seller being involved in the property going forward at all (fix n' flip or rental to an unrelated tenant)How does the affidavit apply to an LLC buyer?
• My understanding is that the intent of the disclosure is to avoid mortgage fraud by allowing a related party to purchase the home at a deep discount then reselling or renting the property back to the original seller.
• The affidavit is not only a disclosure of information but prohibits the buyer to be of relation to the seller.
• The intent of my purchase will not include the seller being involved in the property going forward at all (fix n' flip or rental to an unrelated tenant)
• How does the affidavit apply to an LLC buyer?
• Seller hardship and financial status validationThrough my research on the Short Sale process I understand a seller will need to submit a package to the bank that will be used to understand the seller's ability to continue paying the mortgage as well as the properties value and position in the market. (W2's, taxes, paystubs, financial statements)Seller has ability to continue paying the mortgage.  I'm assuming the seller would need to show history of inability to pay the mortgage (2-3 months) before submitting a package for short sale to the bank?What type of debit to income ratios or other personal financial metrics do banks use to evaluate a seller's hardship position?Using the 70% rule, the remaining mortgage on this property is about 20% higher than the formula would drive.  I'm not looking for a 50% rule price for the bank to accept.
• Through my research on the Short Sale process I understand a seller will need to submit a package to the bank that will be used to understand the seller's ability to continue paying the mortgage as well as the properties value and position in the market. (W2's, taxes, paystubs, financial statements)
• Seller has ability to continue paying the mortgage.  I'm assuming the seller would need to show history of inability to pay the mortgage (2-3 months) before submitting a package for short sale to the bank?
• What type of debit to income ratios or other personal financial metrics do banks use to evaluate a seller's hardship position?
• Using the 70% rule, the remaining mortgage on this property is about 20% higher than the formula would drive.  I'm not looking for a 50% rule price for the bank to accept.

• My understanding is that the intent of the disclosure is to avoid mortgage fraud by allowing a related party to purchase the home at a deep discount then reselling or renting the property back to the original seller.
• The affidavit is not only a disclosure of information but prohibits the buyer to be of relation to the seller.
• The intent of my purchase will not include the seller being involved in the property going forward at all (fix n' flip or rental to an unrelated tenant)
• How does the affidavit apply to an LLC buyer?

• Through my research on the Short Sale process I understand a seller will need to submit a package to the bank that will be used to understand the seller's ability to continue paying the mortgage as well as the properties value and position in the market. (W2's, taxes, paystubs, financial statements)
• Seller has ability to continue paying the mortgage.  I'm assuming the seller would need to show history of inability to pay the mortgage (2-3 months) before submitting a package for short sale to the bank?
• What type of debit to income ratios or other personal financial metrics do banks use to evaluate a seller's hardship position?
• Using the 70% rule, the remaining mortgage on this property is about 20% higher than the formula would drive.  I'm not looking for a 50% rule price for the bank to accept.

Just trying to understand if there are both legal and ethical means to move this deal from good to great.  I'm leaning to probably not, but I'm curious on your feedback.

Thank you

Jennifer Kinzle · Answer

@Eric Jackson You indicated that this is a second home?  I would find it unlikely to be able to short sale any sort of investment property like this, especially if it is current on payments and owner is able to maintain payments.  It is not showing financial distress!  Banks require sellers to show clear hardship on owner occupied properties, such as a job loss, a health issue, disability or other issue like divorce, pertaining to their financial situation.  An investor owned property like this one isn't a short sale situation.  It sounds like this would be more like an assumption of the mortgage.  Is there any equity?  If it won't retail on the MLS, you might consider pulling the equity out and looking to fix it up just enough to make it decent, then selling it as-is, for a cash deal.  However, your father may still be on the hook for a deficiency judgement for any remaining unpaid mortgage balance.  A tricky situation, especially with family involved.

Patrick L. · Answer

Everything about your plan is off base, no chance of this happening.

Sounds like it would be in your father's best interest to list the property on MLS and see if he can't come up with an offer that would pay the mortgage off in full.

Wayne Brooks · Answer

It doesn't matter what your interpretation of the purpose of the arms length affidavit is.  Once you reveal you are related to the seller, the short sale will be disssllowed.  Not revealing it is fraud, regardless of your reasoning. What are the actual numbers? A lender won't be accepting anything close to the 70% rule formula.  Sounds like maybe the property really isn't upside down.  If the seller has the ability, even if not the desire, to make his monthly payments, without some impending imminent reason for default, the short sale would be denied.