Source: Paraphrased from an article by Kathy Mehringer, Director of Risk Management for Coldwell Banker Residential Brokerage and Short Sale Advisor
The majority of short sale servicers/lenders (i.e. “the bank”) require some version of an Arm’s Length Affidavit. These documents and others like them typically stipulate that the parties to the transaction are not related to the sellers and that no party will receive any commissions or other compensation that are not previously agreed to by the lender.
Be prepared for other terminology to be used to describe these agreements. For example: Bank of America has, at the request of the National Association of Realtors® as well as the California Association of Realtors®, bifurcated their Affidavit into a: (i) Short Sale Addendum which requires the signatures of both buyers and sellers AND (ii) Licensee Certification which requires the signatures of both listing and selling agents.
It is important to understand that they are not optional agreements, regardless of what they may be called, and will require borrower(s) and buyer(s) signatures as well as listing agent and selling agent signatures. For that reason they ought to be read very carefully before anyone signs.
It is important to note that these Affidavits are signed under penalty of perjury and subject the parties to both criminal and civil liability should the terms of the Affidavit be violated.
The sad truth is Short Sale fraud continues to be problem that lenders/servicers are forced to address through prevention measures such as the Affidavit.
The majority of the Affidavits include a variation of the following provision: “Neither the borrower(s) nor the purchaser(s) will receive any funds or commissions from the sale of the Mortgaged Premises, except as allowed by the short sale approval letter.”
Simply put this means that a licensee who is acting as a principal as either buyer or seller will not be eligible to receive a commission. Some Affidavits take it a step further by including a provision that restricts payment of commission to a licensee who is related to the buyer.
My two cents: Any situation where an agent, seller, and/or buyer secure either a future interest and/or benefit financially through commissions, other payments, or resale of a property without the expressed written consent from the lender—in advance—puts all parties at risk of being prosecuted for defrauding the lender. For principals this could mean huge fines and/or jail time, and the same goes for agents who could also risk losing their real estate license. Best to understand the affidavits, and respect the law and short sale process as the lesser of two evils to get us out of this mess and avoid more foreclosures. –Grant Bixby