NJ Foreclosure Sale: What is an Arm’s Length Transaction?

When a piece of real property is scheduled for NJ foreclosure sale (also known as and commonly referred to as the Sheriff’s Sale), an interested buyer, investor or “house hunter” may reach out directly to the homeowner. Even when a homeowner’s property is in foreclosure with the Sheriff’s Sale scheduled, they (the owner) have the legal right to attempt to sell the home.

A home that is in NJ foreclosure is likely to sell at Sheriff’s Sale for substantially less than its real value. This can end with the original homeowner owing the lender the difference between how much they still owed on their mortgage loan and the foreclosure sale price. This is called a deficiency, and although lenders do not always pursue a deficiency judgement from the court, sellers should know that it is always a possibility.

Armed with information about a potential deficiency judgement, a homeowner going through the foreclosure process is smart to attempt to find a buyer before the Sheriff’s Sale date. In fact, should the homeowner find an “arm’s length” buyer prior to the foreclosure sale, it’s good news all around. The lender doesn’t have to move forward with their sale, which saves them time and money, and of course, the original homeowner may very well receive a better offer outside of a Sheriff’s Sale. Lastly, the new buyer can feel good about purchasing a foreclosure property before it is up for public sale, eliminating the competition.

What is an Arm’s Length Transaction?

When a homeowner’s lender moves forward with foreclosure, the homeowner still retains ownership and the ability to sell the property before the Sheriff’s Sale, but there are several stipulations in order to guarantee that a seller in this situation can only sell to a party who is considered an Arm’s Length buyer.

For a transaction like this to be considered fair, New Jersey real estate laws state that both the buyer and the seller must not be in any kind of relationship that is closer than “arm’s length.” The following are examples of relationships that are not arm’s length, and therefore would not be ideal buyers before the Sheriff’s Sale:

  • Family members
  • Close friends
  • Employer/employee
  • Parent company/subsidiary
  • Trust/beneficiary

As long as the homeowner is negotiating with someone who is not acting in the homeowner’s best interest (for example, a parent buying the home below market value only to allow their child, the seller, to keep living there), the end result of a transaction prior to foreclosure sale is typically a good idea.

An Arm’s Length Transaction must involve two parties who are independently acting for their own self-interest. Also, the best and fairest deal that is close to the home’s market value should ultimately be the goal of this type of transaction.

Is it Illegal to Participate in a Non-Arm’s Length Transaction?

While it is not necessarily illegal to sell to a non-arm’s length buyer, when a homeowner is already immersed in the foreclosure process, it is advisable to follow the recommendations of an experienced NJ foreclosure/real estate attorney. Ask your attorney to hook you up with a reputable tax professional as well, because transferring property to a non-arm’s length buyer comes with additional tax implications.

Learn more about your rights during foreclosure!


Parents Facing Foreclosure: How Adult Children can Help

Many older Americans are really struggling financially. Some are forced to keep working well past their desired retirement age, while others retire only to discover that money is much tighter than they realized it would be.

Sometimes, older homeowners who find themselves under water are lucky enough to have adult children who are anxious to do whatever they can to assist their parents. The question then, is: what can be done?

If your aging parents are having a lot of money trouble – so much so that they are having trouble paying their mortgage and utility bills – you undoubtedly want to help. If you could snap your fingers and make all of their money woes disappear, you would. But what is the reality of a situation like this?

If your parents’ home is put up for sale as a short sale, you will have a really hard time being approved to buy the home “back” for them simply because you are not what is considered an “arms length” buyer. In other words, short sale transactions are structured so that no buyer has an advantage over another buyer.

An option that may be a reality if your parents are not paying their mortgage is foreclosure. However, if their home goes into foreclosure and is sold at Sheriff’s Sale, you’d be taking a gamble at being able to buy it back for them (you’d need to have cash on hand and the ability to out-bid other interested parties.

It may be wise for you to help your parents find a reliable attorney who can walk them through filing for bankruptcy. A NJ bankruptcy attorney will be able to ensure that the right type of bankruptcy is filed for your parents’ specific financial situation. They may be able to keep at least some of the equity (if there is any) in their home by using federal bankruptcy exemptions.

Your parents may also qualify for a Chapter 13 bankruptcy, in which their debt would be restructured so that it is more manageable for them, keeping them in their current home with new, lower mortgage payments.

Another solution would be to help your parents (with the assistance of an attorney) apply for a loan modification without filing for bankruptcy. If they are able to pay for most of their other monthly necessities, like utilities, food, insurance and medication, modifying the terms of their mortgage may be all that is needed.

The absolute, #1 answer to this problem is for you to personally bring their mortgage current, if you have it in your power to do so. This will ensure that your parents stay in the home while you decide with them which path is the best option for them to be able to continue making the payments after the dust settles.

Remember that it is always in your (and your parents’) best interest to work with a qualified attorney on matters as important as keeping their home. Ask about a free consultation meeting with a local bankruptcy and loan modification lawyer, and keep in mind that investing in their professional assistance will be worth it when you get the end result that keeps your parents at home.

Image credit: J.B. Hill