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Arm's-Length or not Arm's Length

Discussion in 'Urgent - Help Needed' started by Donna Quixote, Nov 6, 2011.

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  1. Donna Quixote

    Donna Quixote Member

    2
    May 23, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Wisconsin
    I have a comp, the only comp in this condo complex within 12 months, where price was greatly reduced (asking $199k and sold for $168,900) and property was listed on the market for 81 days. Talked to realtor who stated that this started out as a typical sale, and that sellers were willing to wait a reasonable amount of time to sell, which is typically 4 to 6 months. It seemed priced for the proper listing price for competing complexes. Seller found out they were having triplets and decided they had to sell immediately and reduced the price to $189K and accepted a cash offer with no appraisal or contingencies for $168,900 shortly after. Realtor said they never would have taken such a hit but they had to move before the babies came and they had to find a bigger house and move before winter.

    So technically this condo did have exposure time to the market, but the seller became more motivated with an instant need to sell and buyer had an advantage of cash offer. Would you consider this Arm's Length or not? The thing I am hung up on is the fact that it was on the market for almost 3 months, so we have exposure time.

    This sale is the low ball one of my comps by 20K to 30K and it is throwing my numbers off. It is a nice unit in a very good neighborhood, I am just stuck using it because it is the only recent sale available. I have comps from to other complexes near by with similar age, style and condition as well as amenities. I have comps over 12 months old in complex which line up with the other sales taking into account time adjustment.
     
  2. Paul Isolda

    Paul Isolda Senior Member

    2
    May 20, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    Connecticut
    Sounds like seller was not typically motivated, whether it be at time of listing or time of contract. I think you have a reasonable case for stating it is not arms-length but based on the availability of data you will have to use it anyway. I would take care of the issue in the reconciliation of the SCA.
     
  3. Ariba

    Ariba Senior Member

    2
    Feb 8, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    What has this to do with Arm's Lenght Transaction?

    Arm's Length Transaction Mean?
    A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm's length transaction is to ensure that both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party.
     
  4. George Hatch

    George Hatch Elite Member

    195
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    California
    If it doesn't fit the prevailing trend then it's just an outlier. You probably come across such outliers among the datasets of many of your assignments. Even if the motivation was "typical" it would still only be one datapoint and could not be construed as indicative of a larger trend.

    The only complication you need to resolve is the question of whether this project has or hasn't sold in the same price ranges as the competing projects nearby. A quick review of the sales history in the project as compared to others will answer that question. If for some reason that project has always sold lower it would become apparent during such a review and could trigger a question of why that is. If not then you're back to the one sale being just one sale out of a larger dataset.
     
  5. residentialguy

    residentialguy Elite Member

    165
    Mar 24, 2009
    Professional Status:
    Certified Residential Appraiser
    State:
    Minnesota

    Agree with this statement. I personally think this an arm's length transaction...just one affected by high motivation. Although an argument could be made that it was subject to high pressure, therefore it is not an Arm's length sale. REOs and Shorts...are they arm's length? Surely they have excessive stimulus to sell. The UAD separates them from Arm's length, adding strength to the side of "no, it's not arm's length".

    I don't get into the arm's length debate issue unless it is clearly non-arm's length, such as a sale between family members. I adjust for motivation/stimulus. Now that you know these motivations, you can adjust for it. It would be reasonable to adjust it so the the adjusted sales price ends up similar to the other 3 or more comp adjusted sale prices that you use (sensitivity analysis). You could also not adjust but factor it similarly in reconciliation.
     
    Last edited: Nov 6, 2011
  6. leelansford

    leelansford Elite Member

    45
    Mar 29, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois

    Yep, that's the point that I was going to make.

    I frequently see appraisers (and others) using the term to mean "atypically motivated" or "distress" when it is as you describe.
     
  7. Smokey Bear

    Smokey Bear Elite Member

    0
    Dec 8, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Typically motivated applies to market value, not arm's length. However, you can try to extract the discount for the quick sale and adjust for it, since you have so much info on the quick sell need. Similar to an REO sale where the bank has asked for a 90 day value, it's discounted based on the normal DOM.
     
  8. George Hatch

    George Hatch Elite Member

    195
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    California
    If you have other sales you can use I see no reason to even present this as a direct comparable, except maybe to cut off the why-didn't-you-use-it question before it gets asked.
     
  9. NorthTexValuation

    NorthTexValuation Senior Member

    0
    Sep 17, 2011
    Professional Status:
    Certified Residential Appraiser
    State:
    Texas
    Agree. I would probably use it as Sale #6 and then explain why extreme seller motivation caused it to appear to sell somewhat below market value compared with the remaining comp sales.
     
  10. sail143

    sail143 Junior Member

    6
    Oct 6, 2011
    Professional Status:
    Certified General Appraiser
    State:
    Rhode Island
    Dictionary of Real Estate Appraisal - arm's-length transaction: "A transaction between unrelated parties under no duress". (Complete definition) As you describe this sale you have unrelated parties but one became more motivated of their own accord. You need to explain this sale considering market conditions because it exists. Try to develop an adjustment for the motivation.
     
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