Working with a Short Sale? Better Watch the ‘Arms-Length Affidavit’ Carefully…

Working with a Short Sale? Better Watch the ‘Arms-Length Affidavit’ Carefully…

2 min read
Ken Corsini

Ken Corsini is a seasoned real estate investor and business owner based in Woodstock, Georgia. Ken is best known for his role on HGTV’s hit show “Flip or Flop Atlanta,” and has flipped over 800 houses in Metro Atlanta since 2005.

With over 15 years of experience in the real estate industry, Ken has expanded his original flipping business into multiple independent real estate businesses, including Red Barn Real Estate, with over 180 agents in Metro Atlanta across four offices; Red Barn Construction, a custom home-building company specializing in modern farmhouses across North Atlanta; Red Barn Renovations, a full-service renovation company; Black Oak Mortgage, a direct lending company based in Woodstock, Georgia; and InvestorSumo, a technology company focusing on CRM and data needs for real estate investors.

Having been involved in thousands of transactions and having owned over 800 houses, multiple commercial and multifamily properties, and more, Ken brings a wealth of knowledge and experience to the BiggerPockets community. He has authored over 100 blogs and currently hosts the “Best Deal Ever Show” on the BiggerPockets YouTube channel. He is also the host of the popular Deal Farm Podcast.

Ken is currently writing a book in conjunction with BiggerPockets called “Profit Like the Pros,” scheduled for release in Fall 2020.

He and his wife also run Roc.Star Kids, a non-profit organization focused on the needs of children and families in the fight against childhood cancer. For more information on this very personal cause, check out their story here.

In addition to HGTV and HGTV Magazine, Ken has been featured on The Today Show, People Magazine, The LA Times, Think Realty Magazine (cover), TV Insider, In Touch Weekly, Life and Style Magazine, The Wrap, The Atlanta Journal Constitution, UGA Today, US Chamber of Commerce, PopSugar, Entertainment Magazine, and a number of local periodicals.

Ken has a Business Degree from the University of Georgia and a Masters Degree in Building Construction from Georgia Tech.

Ken is currently licensed as a general contractor (commercial) in the state of Georgia.

Instagram @kencorsini
Twitter @kencorsini

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Many investors have found that REO inventory is drying up and more and more short sales are being listed on local MLS databases. I suppose after 5 long years drudging through distressed inventory, banks have finally figured out that short sales just make more sense in most cases then foreclosing.  That’s not to say that banks have sped up the short sale process, but at least the general trend seems to be headed in that direction.  (Interestingly, I just had a short sale approved on a property I’ve been negotiating since January of 2012 … only took 17 months!)

With that said, new investors need to be VERY aware of the rules and risks associated with buying short sales. Many wholesalers are accustomed to double-closes and other creative techniques for selling properties that they have contracted or control. It is important to understand that short sales are a completely different animal.

One of the most important components to a short sale purchase is the arms-length affidavit. This is a document put together by the bank that owns the mortgage on the property. The purpose of the document is to highlight and disclose any relationships between the  buyer, seller, agent, etc. and outline the parameters by which the bank is willing to agree to the short sale. In essence, it’s the document that spells out the guidelines that a particular bank has set forth for a specific short sale.

What’s the Purpose of the Arms-Length Affidavit

Most banks will tell you the purpose of the arms-length affidavit is to prevent mortgage fraud.  A common example might be as follows:   John and Kate are upside on their home and are having trouble making the mortgage payments.  John asks his dad to step in and buy the house from the bank on a short sale at half the price of his current mortgage.  Once his dad has purchased the house, John and Kate would either buy it back (at half the price of their original mortgage) or rent it from him so they can stay in the house.

As an investor, it’s important to look closely at the affidavit for a given property to make sure you are sticking to the agreement. While you may not be related to the seller, I’ve found that it’s not uncommon for sellers to ask to rent the property back from the buyer.  As an investor, it may seem perfectly harmless (and convenient) to keep the seller in the home as a renter. However, most arms-length affidavits have a provision specifically stating that the buyer cannot rent the property back to the seller.

Also, most affidavits have a resell restriction limiting the buyer’s ability to resell the property within a given time-frame.  The most common provision is a 90 day hold period whereby the buyer is unable to resell the property within the first 90 days of purchasing it. However, I’ve seen some for 30 days and some for 60 days.

Other Provisions in an Arms-Length Affidavit

  • Disclosure of family and or business partner, common business interest
  • Prohibition of undisclosed arrangements or agreements between buyer and seller
  • No additional compensation paid or received by any of the parties other than commission to agents that are disclosed on HUD1 Settlement Statement

It’s imperative that investors understand that this agreement is binding and not to be taken lightly. Any breach of the agreement can constitute mortgage fraud and land you in very hot water. It’s critical that any purchase of a short sale be analyzed carefully to know when the property can be resold, who it can and cannot be resold to, and that there are no “side” agreements that could potentially place you in violation of the arms-length affidavit.

Photo: Debra Drummond

Many investors have found that REO inventory is drying up and more and more short sales are being listed on local MLS databases. I suppose after 5 long years drudging […]