Short Sale of a Home to a Relative

There is no law outlawing short sales to a relative per se. There are obstacles, however. The issues you will have to face are two-fold:

1) Assuming you want the bank to approve the short sale in a manner that you do not have to pay any remaining balance on the loan, you’ll need to convince the bank that this is a good deal—probably the best it can expect to receive (the same as you would for any short sale). The natural assumption will be that you are giving your relative a break. As a result, it will be more difficult to get the bank to approve a short sale to a relative than it would an ordinary short sale—and those are hard enough to get approved as it is.

2) If the bank suspects collusion—such as the relative kicking back some money to you under the table—then they may accuse you of fraud and possibly either sue you for damages and/or refer the matter to law enforcement.

Therefore, what you will need to do is to prove to the bank that this is on the up and up; that your relative is getting the same terms that a stranger would get in an arm’s length transaction. Transparency and documentation are key. For example, you will want to document comparable sales in your area even more carefully than you would for a “regular” short sale, to show that the amount being offered you is market rate for your home.

You should disclose up front that the relative is a relative—if it comes out later, the suspicion will be that you tried to hide the fact for fraudulent purposes.

You should also document all of your financials and your situation very thoroughly, as you would for any short sale. You have to show real hardship and need before a bank will consider this.

Also, be aware that certain behavior will be viewed with suspicion. If any otherwise unaccounted for payments or assets show up when your financial situation is reviewed, the bank may think these are proceeds from additional consideration for the sale.

In short, pretend you’re running for President and assume that any hint of impropriety will be pounced on—then make sure there is no hint at all.

Case Studies: Short Sale of a Home to a Relative

Case Study 1: The Transparent Transaction

John wants to sell his home to his brother, Mark, through a short sale. John understands that he must demonstrate to the bank that this transaction is fair and comparable to an arm’s length transaction.  To achieve this, John meticulously gathers documentation on comparable sales in his area to prove that the offered amount is market rate for his home.

He also discloses upfront that Mark is his relative, ensuring transparency from the beginning. By presenting a thorough financial situation and hardship, John increases his chances of obtaining approval from the bank.

Case Study 2: Avoiding Suspicion

Sarah plans to sell her property to her sister, Emily, through a short sale. Aware of the potential challenges, Sarah takes extra precautions to avoid any suspicion of impropriety. She maintains complete financial transparency, ensuring there are no unaccounted for payments or assets.

Sarah understands that any additional consideration for the sale may raise concerns, so she remains vigilant. By following all legal requirements and providing comprehensive documentation, Sarah minimizes the risk of fraud accusations and maximizes her chances of a successful short sale.

Case Study 3: Overcoming Approval Hurdles

David intends to sell his home to his cousin, Lisa, through a short sale. Recognizing the difficulties associated with obtaining bank approval, David prepares a strong case. He gathers extensive evidence of his financial hardship and the market value of his property.

By going above and beyond the documentation required for a regular short sale, David presents a compelling argument to the bank. His thorough approach and diligent adherence to the process increase the likelihood of securing approval for the short sale.