Short Sale Duplexes Require Strangers

Is it possible to sell your owner-occupied Minneapolis duplex through a short sale, and never have to move?

Many distressed duplex owners have thought of this. After all, what’s to stop you from selling it to a friend or family member, then either renting your unit back or, ultimately, buying the property back?

The bank.

It’s important to remember that banks and government-sponsored entities like Fannie Mae and Freddie Mac are losing tens if not hundreds of thousands of dollars on short sales and foreclosures.

To protect themselves from losing even more money via fraud, one of the requirements to a short sale approval is that it be an arm’s length transaction.

What’s an arm’s length transaction? One in which two strangers are involved in the sale and purchase of a duplex.

The thinking goes that buyers and sellers who are strangers are more likely to agree to a sales price close to fair market value than are two friends or relatives. That’s because, of course, the seller wants to net as much for the duplex as possible, while the buyer wants to pay as little as she can.

Friends and family are likely to give each other a discount. I suppose the same could be said of a buyer and seller who are indeed unknown to one another but agree to the seller staying on as a tenant; theoretically, anyway, the seller would be inclined to offer an incentive so as not to have to move.

Of course, when it comes to short sales between strangers, I think that’s a difficult argument. The seller doesn’t have that much negotiating power, as it’s the bank that ultimately approves or disapproves the terms of the purchase.

Who enforces these things? In real estate fraud cases, usually the FBI. And I suppose renting back would fall under that category.

Then again, this might also fall under the jurisdiction of the mattress tag removal division.