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Arms-Length vs Non-Arms-Length?

Discussion in 'Urgent - Help Needed' started by 65076507, Mar 4, 2012.

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  1. 65076507

    65076507 Junior Member

    0
    Jan 1, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Maryland
    This has been covered on other threads but there never seems to be agreement.

    My friend who is Certified in Maryland and I have this debate that has been going on for about 6 months now and I need help. The debate is this:

    I say just because a comp is an REO does not mean it is Non-arms-length. It all depends on the situation. If it is priced competitively, had reasonable exposure, etc.....and meets the definition of an arms-length transaction then it is in fact arms-length. He thinks that because it is REO that automatically means it can NOT be arms-length. Can you guys and gals help us with this debate??????
     
  2. 65076507

    65076507 Junior Member

    0
    Jan 1, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Maryland
    I just wanted to add that because it is REO his argument is it is a distressed sale and thus not arms-length. Is it safe to assume every REO is distressed. I seen plenty of REO properties that are priced at market value, if not higher, and they decline offers coming in at 90% of list price. I am just not convinced that it is safe to say every REO sale means not arms length every single time. ANy thoughts?
     
  3. Punalava

    Punalava Junior Member

    0
    Jul 23, 2005
    Professional Status:
    Certified Residential Appraiser
    State:
    Hawaii
    You're right and he's wrong.
     
  4. CindyR

    CindyR Member

    39
    Oct 26, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Arizona
    I think your buddy has forgotten that the overriding answer to every apprasial questions is 'it depends'. Yes - an REO sale can be a distressed sale. Here in AZ we've got more REO sales than the proverbial carter's got peanuts. They are setting the market and buyers are happily snatching them up based on condition and features anad without regard to seller characteristics. Often they sell higher than similar owner-sales and often they sell lower. But the lender can hold them in inventory or offer them at auction or rent them or do all kinds of things with them. They decide to sell them when they decide to sell them and they are often not distressed.
     
  5. 65076507

    65076507 Junior Member

    0
    Jan 1, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Maryland
    Thanks Puna And Cindy,

    That's What I Thought. It Is Silly To Say Every Reo Is Distressed When Every Situation Is Different. Thanks Guys! I Appreciate The Comments.
     
  6. J Grant

    J Grant Elite Member

    243
    Dec 9, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Florida
    Your friend is wrong and in any case, distressed sale and arms length are still differen concepts, and people exchange the word "distress" sale and REO sale interchangeably and they are not the same.

    The UAD is also at fault because they use the word arms length incorrectly, to set the sales apart.
     
  7. Randolph Kinney

    Randolph Kinney Elite Member
    Gold Supporting Member

    77
    Apr 7, 2005
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    arms-length transaction
    A transaction between unrelated parties under no duress.


    Duress
    In jurisprudence, duress or coercion refers to a situation whereby a person performs an act as a result of violence, threat or other pressure against the person. Black's Law Dictionary (6th ed.) defines duress as "any unlawful threat or coercion used... to induce another to act [or not act] in a manner [they] otherwise would not [or would]". Duress is pressure exerted upon a person to coerce that person to perform an act that he or she ordinarily would not perform. The notion of duress must be distinguished both from undue influence in the civil law and from necessity.

    Duress has two aspects. One is that it negates the person's consent to an act, such as sexual activity or the entering into a contract; or, secondly, as a possible legal defense or justification to an otherwise unlawful act.
     
  8. residentialguy

    residentialguy Elite Member

    136
    Mar 24, 2009
    Professional Status:
    Certified Residential Appraiser
    State:
    Minnesota
    Here is where you and Cindy are wrong. You just changed gears from non arms length to distressed. Every REO is a distressed sale, as is a short sale. That doesn't mean that REOs are not an arm's length sale, however. If they were all non-arm's length, they could not be considered. They can be arms length sales. However, they are distressed sales and this distress often results in a market reaction that must be considered.
     
  9. Terrel L. Shields

    Terrel L. Shields Elite Member
    Gold Supporting Member

    302
    May 2, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Arkansas
    Why? Is that in the definition of Arm's length? I could fire my rifle into the air and the bullet kill a deer....it doesn't mean I aimed the gun.

    Banks do not willingly own property. They are not a typically motivated seller. They can, often are, under mandate from the regulators to dispose of their REO assets in an orderly manner.

    Short sales. Typically, someone is underwater...well underwater. They, the bank, and the Realtor all understand that they are underwater and offer it for a MARKET PRICE, i.e.- Market Value. They KNOW they cannot get more. They MIGHT get an offer for less but say they manage to sell that property at exactly MARKET VALUE....that still does not make the transaction "arm's length". The transaction is non-arm's length even when the price is "right." Exposure to the market is not the proper test for "arm's length"... Arm's length relates to the duress and pressure the seller and/or buyer is under. Frankly, in the boom, the whip hand was the seller and many buyers paid above "market value" because appraisers rubber stamped the market pricing which was inflated. Buyers felt compelled to make offers on properties that they knew was "high" - many admitted it - but were under the mistaken idea that the NAR promoted for years... "Real Estate never drops in price"....They thought they would "come out" in the long run.

    These concocted deals that were 110% loans etc etc. were not "arm's length" and short sales and REOs were not "arms' Length" no matter if the transaction price is the same as "Market Value".. The two terms are not synonymous.

    Likewise the REO and short sale is a duressed sale, thus can never be "arm's length" regardless that it might be a good proxy for market value in that the pricing is similar to that had the house not been underwater and had been offered for sale at market value.

    That's my story and I'm sticking to it.
     
  10. residentialguy

    residentialguy Elite Member

    136
    Mar 24, 2009
    Professional Status:
    Certified Residential Appraiser
    State:
    Minnesota
    Good post, Terrel

    I think it's important to use widely defined terms the way that the user uses them so that it is not misleading to them. As JG pointed out, UAD obviously sees a distintion between AL and REOs, Shorts, etc.
    Even though we may not agree with UAD formatting, that's what we are working with and that's the language we have to speak.
     
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