Q: Mr. Aldana, I was recently approached by a friend who is losing his home and asked me to buy his home as a short sale, and then within a few months, change the ownership back to him so he can keep his home and I can be free to buy another home. Apparently, a real estate agent has been counseling him and telling him this is done all the time. Is this possible?
A: This sounds like fraud. Proceed at your own risk. Most short sale transactions include a “arm’s length” contractual clause that forbids you from having any stake in the sale other than the sale itself. The clause forbids the seller from re-buying the home, recovering title to the home or selling the home to a relative or business associate or having other agreements with the buyer, again, except to sell the home to the buyer.
A short sale occurs when a seller owes more for a property than its value and negotiates with the lender to forgive the difference provided a buyer is a available. In some states a short sale can generate tax, credit and other financial consequences. Anyone considering a short sale should consult with a qualified certified public accountant or a real estate attorney.
All short sale agreements must be disclosed to the lender and the lender will not agree to any terms that don’t comply with the arm’s length clauses which all parties must sign and swear under penalty of perjury that they will not violate.
Lenders and banking regulators are aware of growing incidents of short sale fraud and not only must the parties sign the contract which forbids back room deals, but lenders audit the transaction. An audit will pull the title documents and if they reveal fraud, say if the property is sold back to the seller, the lender can call the loan and force you to pay it in full immediately.
Also, while it’s easy to transfer the title from one person to another, it’s not so easy to transfer the responsibility for paying the mortgage. Even if you transfer the title, unless you have the lender’s approval you will remain responsible for paying the mortgage even if you don’t have rights to the property. That could make it difficult for you to buy another home or acquire other credit. Your credit will suffer if your friend fails to pay the mortgage on time.
Imagine having perfect credit and then being at the mercy of someone else and hoping that they are never late on the mortgage for the next 30 years while you have no rights to the property.
My advice? Tell your friend to find an honest real estate agent. Yes, this kind of under-the-table deal between sellers and agents happen everyday, but that doesn’t make it right and it could cost all parties involved a stay in county jail.