Arm's Length vs Non-Arm's Length Sales

[Ricky LaFleur]

I've heard from appraisers a number of times how a sale of a property to adjoining property owners can be "non arm's length" as they insist the near proximity of the adjoining or nearby owner can create a kind of "duress" or some other atypical representation than the market. When considering sales of this nature, do you believe that when the buyers are adjoining land owners (or very close) that they cannot be considered part of the market? What do you believe is the distinction between the adjoining owner being a part of the market (arms-length) vs becoming an atypical sale (non arms-length)?

 

[shrubberyvaluation]

I've heard from appraisers a number of times how a sale of a property to adjoining property owners can be "non arm's length" as they insist the near proximity of the adjoining or nearby owner can create a kind of "duress" or some other atypical representation than the market. When considering sales of this nature, do you believe that when the buyers are adjoining land owners (or very close) that they cannot be considered part of the market? What do you believe is the distinction between the adjoining owner being a part of the market (arms-length) vs becoming an atypical sale (non arms-length)?

It might be worth more to that person if its adjoining. Sometimes an adjoining lot can be next to worthless for anyone else. I'm brainfarting on the term. Saw one where the owner bought an adjacent property for around $3M knocked down the house, extended their house and put in a pool. Do you think there is a possibility the market might view it differently then someone with an adjoining property?

 

[TerryRohrer]

I don't think being a neighbor results in a non-armslenth transaction. There can be some atypical motivation, but these transactions are certainly part of the market. The only time I would tend not to consider these for most anything is if the neighbor is the only one with legal access to the tract being acquired.

We purchased a lot near a lake, bordering the state land containing that lake. After going over our lot for a year or so, it was obvious that the adjoining lot (unbuildable to most) would improve the usefulness of ours. It had been on the market for 10 years, with no offers. I contacted the realtor owner who told me to make an offer. I offered a third of their asking price and they jumped at it. Our offer was a stab in the dark trying to balance paying no more than we had to and not p*ssing them off to the point they wouldn't negotiate. I would argue that arms length deal was above market value. I had looked at it years earlier and had no interest until owning the adjoining lot.

You could get the same if several neighbors were competing for one tract, but that is how the market works. There is slightly different demand for every property on any given day.

 

[Ricky LaFleur]

It might be worth more to that person if its adjoining.

Do you think there is a possibility the market might view it differently then someone with an adjoining property?

I definitely believe an adjoining owner can have a greater interest than a buyer who is not, but nearly every property has adjoining owners (save for those who own their own island), and I believe they are part of the market.

I don't think being a neighbor results in a non-armslenth transaction. There can be some atypical motivation, but these transactions are certainly part of the market. The only time I would tend not to consider these for most anything is if the neighbor is the only one with legal access to the tract being acquired.

I'd have to agree. I don't quite see how you can ignore those sales typically, save for access or some other consideration as you mentioned.

You could get the same if several neighbors were competing for one tract, but that is how the market works. There is slightly different demand for every property on any given day.

My question stemmed from dealing in farm appraisal and encountering sales to adjoining owners fairly often. Auctions certainly display that kind of competition at times, but I believe that is the market, too. If you've seen aggressive competition like that which might tend to create a wider range from other market sales, and you use those sales in another appraisal, do you ever include but set them aside as outliers from the "bell curve"?

 

[Terrel L. Shields]

My neighbor sold his 75 acres and house for $1.4 million. Next door, 77 acres is offered for $1.5 million now...2 years later. It's pending and surveyors marked our corners since it joins me as well. I suspect the buyer will turn out to be the developer who bought the first parcel. We shall see. The market is insane here. And, of course, some "investors" send me an offer of $238,000 for my 80 acres. Go figure.

 

[TerryRohrer]

If you've seen aggressive competition like that which might tend to create a wider range from other market sales, and you use those sales in another appraisal, do you ever include but set them aside as outliers from the "bell curve"?

I am more inclined to keep these sales in my report and reconcile to a lower conclusion, offerring that additional motivation as the reason for not weighting those sales more heavily. That precludes the opportunity to explain why you didn't use the one sale the borrower is sure to know about and think is "the" market.

 

[andrew81]

An arms length transaction and a non-arms length transaction can have the same or different selling price. Price is not a determination.

 

[J Grant]

I definitely believe an adjoining owner can have a greater interest than a buyer who is not, but nearly every property has adjoining owners (save for those who own their own island), and I believe they are part of the market.


I'd have to agree. I don't quite see how you can ignore those sales typically, save for access or some other consideration as you mentioned.


My question stemmed from dealing in farm appraisal and encountering sales to adjoining owners fairly often. Auctions certainly display that kind of competition at times, but I believe that is the market, too. If you've seen aggressive competition like that which might tend to create a wider range from other market sales, and you use those sales in another appraisal, do you ever include but set them aside as outliers from the "bell curve"?

You keep saying part of the market - that can become a weasel word, which means everything is a comp no matter the terms of sale or odd, atypical motivations of the parties.

Market value (I am sure you know the definitions) takes place under a defined set of terms and conditions and buyer/seller motivations. Anything outside of that, while it may be part of the market, is not a transaction that represents market value; thus, it is typically excluded as a comp.

Market value is also accompanied by a market exposure estimate ( number of days, weeks and months it needs to sell at the MV price in the appraisal )s.

A sale of an adjoining property to the neighbor is either nonarm length or too atypical in motivation to qualify as a market value term transaction. A lot next door to Mr Marshall Jones who lives adjacent, can have a very different value and use particular to him, than to every other buyer in the market .

MV is predicated on the thousands or hundreds or scores of other possible buyers on the open market, not just on Mr Marshall Jones next door. He is an outlier, atypically motivated buyer. He did not purchase the property because it was on the open market ( typically) he purchased it because it is next door and either he approached the seller or the seller offered it to him.

Saying everything is the market, and who cares if it is sold at MV terms is a form of cheating. For example, a sports game (basketball, football, tennis, etc.) has a defined area and a set of rules and regulations and violation and time penalties. Heated arguments, the referee, a game won or lost over a foul .line. Without those rules and limtiaiotns, it is not the sport, it is a a bunch of guys ( or girls ) running around with a ball.

The rules and regs that define the sport,, just like the "guideposts of the market value definition, define Market value

If you are not doing a MV appraisal then you may be free to use the other sales. This is why we have a definition of value in an appraisal.

 

[J Grant]

DEFINITION OF MARKET VALUE: The most probable price that a property should bring in a competitive and open
market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming
the price is not affected by undue stimulus. Implicit in this definition is the... (till end of the definition)

A sale to an adjacent property owner is rarely on the open market. The neighbor as buyer has a very different set of motivations than the other buyers who might be interested. And it is possible sometimes that due to the property itself, no buyers would be interested other than the neighbor. One solitary neigbohr does not comprise an open market.

Even when the price is within a prevailing range, what seems like a "market value price", the terms between related parties might have affected teh price. For example, I was asked to appraise a subject, a sale between a father and a grown son. The price was similar to other prices. I commented on that at the inspection ( the grown son was renting it from dad) and I said"It does not look like you got a break on the price. " The son explained that he owed money to his father, and his father was forgiving the debt, and that was why he was selling it at that price.

 

[Tom D]

big city. unless you can build on that row house lot next door, the only value is to the house next to it. used for parking or an actual yard. we have over 40,000 vacant homes. the funny part is that the city has the custom 30% assessed land value for worthless lots, making them unsaleable to the neighbor. so they sit there, sit, there, sit there. eventually, in some parts of the city the lots do go up in gentrification value. the city has time to wait.