FACTS:

In a short sale transaction, the second position lienholder is unwilling to approve the short sale with a waiver of deficiency. The second position lienholder has stated that under no condition will a waiver of deficiency be forthcoming. Therefore, the seller will not agree to sell and desires to cancel. On the other hand, in an effort to “save the deal”, the buyer offers a cash contribution to the second position lienholder for the full amount owed to satisfy the loan. However, the first position lienholder refuses, without exception, to allow any additional contributions to be paid to the second position lienholder. As a consequence, in a “side” agreement between the seller and the buyer, the buyer agrees to satisfy the amount owed to the second position lienholder after the transaction closes escrow and, in return, the seller agrees to sign the second position lienholder’s promissory note (settlement) and approval letter despite there not being waiver of deficiency.

ISSUE:

Does the buyer’s and seller’s “side” agreement constitute a violation of the agreement with the first position lienholder?

ANSWER:

See Discussion.

DISCUSSION:

Lenders may, and often times do, require that all parties to a short sale transaction sign an affidavit attesting that the transaction is “arms-length”, and that all material information has been disclosed. The following are relevant provisions that are frequently found in the arms-length affidavit: “none of the parties shall receive any proceeds from this transaction except the approved commissions”, and “the parties agree that this addendum together with the sales contract shall constitute the entire and sole agreement between the parties with respect to the sale of the subject property.”These provisions among others explicitly prohibit any type of “side” agreement such as the one described above. In this instance, the parties’ undisclosed agreement?—?that after close of escrow the buyer will pay a sum equal to the deficient amount of the second position lienholder, in return for the seller’s commitment to proceed with the short sale pursuant to the terms and conditions of the first position lienholder’s approval?—?likely constitutes fraud.

Arizona REALTOR® Magazine – November 2012


About the Author

Michelle Lind

K. Michelle Lind, CEO of Arizona REALTORS®, is also an attorney, State Bar of Arizona board certified real estate specialist, and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.
Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.