What is an “arm’s-length” addendum?
This is a document which all parties involved in the short sale (seller, buyer, agents, negotiator, etc.) must sign to verify that they have no prior relationship to one another through family or business interests.
The reason for requiring an arm’s-length addendum.
Since the lender is agreeing to take a loss on the money owed to them, they want to make sure that there are no hidden agreements or understandings between other parties. It is to prevent short sale fraud.
Selling your home to friends or family through a short sale.
A standard arm’s-length addendum prevents you from selling to friends or family. However, as long as you disclose to your lender that you have a relationship with your buyer, and you are not keeping anything secret, they may still approve the short sale - even if it is to someone you know.