Can You Sell a Property As a Short Sale to a Family Member?

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If you are a distressed homeowner in need of getting out from underneath a mortgage, arranging a short sale is one option. A short sale, which involves buying a house for less than the amount the seller owes the lender, may come about if the value of the home has fallen and the only interested buyer isn't willing to pay what your home is worth. However, if you are related to the buyer, your bank may have something to say about your proposed deal.

Family Members

Family members interested in buying your home may have difficulty doing so. That’s because banks often include an affidavit or addendum to your short sale contract in which the buyer and seller must attest that they have no material relationship. An “Affidavit of Arms Length Transaction” forbids any relationship between a buyer and a seller in a short sale, as the bank may assume that both parties would derive a benefit from the sale at the bank’s expense.

Your Notification

You can avoid the problems that can occur when you attempt to arrange a short sale with a family member by speaking openly with your lender. The lender will want to know how much you want to sell your home for; your bank has an absolute say in what price you get for your home. It will also want to know if you are related to or have a business relationship with the person who is buying your home. By being forthcoming with your bank you can avoid problems later on--especially if information about your relationship with the buyer comes up at closing. A failed short sale can quickly lead to foreclosure if another buyer cannot be found.

Best Offer

One way to avoid a problem with a short sale to a family member is to show your bank that the buyer has made the best offer for your home. Your lender may require that your home be placed on the open market for sale. If the transaction price is acceptable to your banker, than it may not matter if you are related to the seller. Your bank wants to limit its losses, something it will have difficult doing if your home slips into foreclosure. If there are other liens on your property, such a second mortgage or unpaid property taxes, then the cost of satisfying those liens will affect your deal.

Considerations

If your bank refuses your short sale to a family member, it may agree to a loan assumption. Under this arrangement, the buyer takes over your mortgage, subject to the lender's approval. This method may prove faster than a short sale which, according to The Wall Street Journal, can drag on if the bank thinks it can get a better deal.

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