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FAQ: What does "Arms Length Transaction" mean?

Posted by: raindrop 6 years, 4 months ago

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Frequently during an escrow on a short sale, Lenders require both Buyers and Sellers required to sign disclosures called an Arms Length Transaction.  

This disclosure is usually one to two pages long, and occasionally is in the form of an affidavit that requires a notary.  The disclosure requires all parties involved in a short sale transaction to sign saying that they are unrelated and unaffiliated.  In non-technical language, the Buyer of a short sale transaction cannot be buying the property for the benefit of the Seller.

A good example of a transaction that would not qualify as an arms length transaction is one where a Buyer was buying a property from friend who wanted to get out from their underwater mortgage, simply to resell it to the Seller later at a reduced price.

Oftentimes the Arms Length Disclosure also stipulates that the Buyer cannot buy the property and rent it back to the Seller.

If a Buyer and Seller sign the Arms Length Disclosure and violate the terms, it is lender fraud; so all parties need to take the disclosure seriously.

Lenders require the Arms Length Disclosure when releasing a lien on a property since they are taking a substantial loss on the loan.  The Arms Length Disclosure ensures the lender that the Seller is not benefiting from the short sale.

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