Thursday, November 15, 2012
Orlando REALTOR® | November/December 2012
Arm's length affidavits have evolved from simple to sophisticated legal documents
By Nishad Khan, Esq.
If any portion of your transactions consists of short sales, the arm’s length affidavit should be a familiar document. Originally this document, signed by both buyer and seller, was very straightforward and established that neither party was related to each other or part of any outside agreements.But as the number of short sales increased, the parties became more sophisticated and many sellers, usually with the help of third parties, devised ways to circumvent the affidavit and "legally” keep the house or receive proceeds after the sale.
Lenders began to catch on and started to revise their affidavits by requiring notarized signatures of the agents, brokers, settlement agents, and third-party processors as well as buyers and sellers. The approval letter became conditioned upon the lender’s receipt of a fully executed affidavit and allowed the lender to invalidate the entire transaction if they later discovered the sale was not at arm’s length.
The recent affidavits introduced by Fannie Mae and Freddie Mac include language that indemnifies the lender and imposes responsibility from every party involved in the transaction to the lender, investor mortgage insurer, and/or any guarantor for any loss incurred from misrepresentations or omissions made to the lender, investor mortgage insurer, and/or any guarantor throughout the entire short-sale process. The affidavit further states that the occurrence of these acts, whether negligent or intentional, may subject each signatory to both criminal and civil liability.
Moreover, these affidavits place post-closing conditions on the buyer and by signing the affidavit, the parties implicitly agree to indemnify the lender, investor mortgage insurer, and/or any guarantor if the buyer fails to comply with these conditions.
Lenders will usually not approve a short sale unless the affidavit is signed by all parties, and any changes or alterations to the document will generally be rejected and hold up the entire transaction.
The Central Florida Real Estate Council provides this column on real estate law issues as a service to ORRA members to provide a general understanding of the law on various topics of interest, not as a substitute for individual legal consultation, and should not be relied on in specific situations without consulting with a real estate attorney.
Nishad Khan, Nishad Kahn P.L., is a member of the Central Florida Real Estate Council and can be reached at email@example.com.