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Short Sale to a Tenant Occupied Property NOT "Arms Length"?

Posted by Leigh Nicholes Realtor 01129851 on March 14, 2011 at 5:34pm in Short Sale Discussions
Has anyone been denied approval by the bank in a tenant occupied property  where the tenant has made an offer? The bank is saying this is not an "Arms Length" transaction. The property is managed by a brokerage. Is this in violation of Fair Housing Regulations? Comments and insight welcome.

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Tags: Tenant, arms, fargo, leigh, length, nicholes, sale, short, wells
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  • Karen Walls March 20, 2011 at 3:59pm
    Disclose, disclose to the bank and investor is my rule number 1-100. I totally agree with Tni on this one, what happens to "first right of refusal"? Does that clause fly out of the window when folks face a hardship to the detriment of the tenants and hardship of the seller? Isn't that a breach of some sort if the clause written is incorporated into the landlord tenant's contract? With these CFK  (cash for keys) programs  and also FNMA  considering even leasing back to tenants, there is the NSP programs out there buying home for low income first look, all these programs being offered to elminate vacant homes.  Buying a home that is affordable for displaced tenants is off limits seems counterproductive.  If they are not relatives, what's the big deal? Half of landlords and tenants can't usually tolerate one another at the end of the day,, wouldn't shake your hand if you extended a branch, no less a "arms length" transaction. Sounds funny but actually ridiculous!  With landlord tenant laws do we now include in the lease agreement verbiage that if the owner loses the home to foreclosure or a hardship,  the "first right of refusal" is no longer applicable nor valid and get the hay out ? Seems real murky and legal issues sure to follow on lease agreements in landlord tenant courts, this sounds like some case law needs implementing.  What about lease options etc, those too out the window? Who pays back if  owners now claim a hardship and are broke, escrow gone?  Guess it depends, on the bank. One bank  asked were the renters in the financial position to buy the home I had a SS on and they were and we made totally full disclosure with  forms, an attorney and  not a problem with servicer and investor!  Property mgmt companies better be prepared for this one!
  • Tni LeBlanc (805) 878-9879 March 20, 2011 at 2:26pm

    Does your state or locality give a tenant a "first right of refusal" when a property is being sold?

     

    I would take this all the way up the chain.  Bank policies should not favor displacing a tenant who can afford to buy the property.  I would put some public pressure as well.

     

    If you have already submitted another offer the issue may be moot now though.

  • Leigh Nicholes Realtor 01129851 March 20, 2011 at 2:13pm

    The tenant has been in the property for more than a year.  The tenant was disclosed to the bank up front.  This is what triggered them to reject the offer. We escalated the situation to a senior negotiator and the answer was the same. No one on my team predicted this would be an issue as we have seen it done in the past.  An alternative offer was submitted.

    Great Input from everyone.  Thank You.

  • Tni LeBlanc (805) 878-9879 March 20, 2011 at 8:24am

    To me, the key issue is disclosure.  Once you've disclosed it it is in their court to accept or reject. 

    Get some legal advice of course.

  • Michael Schneider March 20, 2011 at 8:03am

    By HUD rules, I would agree with Bryant, this is not an arms length, which I think is defined as relationship through blood, marriage, or business.  A tenant has a contractual business relationship with the seller.

    The question is, would the Servicer, Investor and Insurer approved the sale?  I think this will depend on the parties. Eg, I think Wells/FHA would probably say no.  And, I'm pretty sure this violates the SunTrust arms length, for example.

    But, for a securitized loan, or an unregulated Investor, it's probably okay.

    It is a bit like selling to a relative.  It's not illegal, but it's a red flag event for a regulator.  May not be worth the bother to the Bank to justify and explain, when the regulator asks "how come?"  If I were an OCC regulated bank, I think I would not do this, I'd rather give up $5000 in price.

  • Tni LeBlanc (805) 878-9879 March 20, 2011 at 4:02am

    I've never had anyone tell me that and I've done a couple and I'm doing one now.  I put that information in my cover letter when I open the file.  In all the cases I'd handled the tenant and the landlord had never met or had one conversation.  I've read through many arms length affidavits and never seen a prohibition on it. 

    I would escalate the matter. 

  • Donna Paul March 20, 2011 at 1:45am
    I just closed a short sale for Chase and the tenant purchased the property.We made sure to disclosure the facts if it's needed. On another note the tenant still paid their rent because they wanted to make sure the landlord keeps the ligts on.
  • Jeff Payne March 15, 2011 at 6:34am
    That was my thought, signing an affidavit might work.  As you can see today, my wheels are turning and that can be dangerous for me
  • Bryant Tutas March 15, 2011 at 6:33am
    Jeff. I believe there are exceptions to every rule. The problem is how are you going to prove it? Maybe the seller and the tenants can sign an affidavit?
  • Jeff Payne March 15, 2011 at 6:10am
    Bryant, do you think that this could be an arms length transaction if the buyer and seller have never actually met because the buyer is actually renting through a rental manager and makes their payments directly to the rental manager?
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