Arms Length Sale Question

[larabaker]

If I purchase a home that is up for auction at a tax sale an arms length sale?

 

[Artemis Fowl]

No and yes. Depends how you are defining Arms Length.
No...because it is not a meeting of the minds of two parties maximizing their advantage in negotiation. This; if by Arms Length you actually mean a sale that represents a market value type price.
Yes...because it meets the technical definition of Arms Length as to unrelated parties.

Either way I would be very unlikely to consider it as a comparable for a market value opinion.

 

[Fernando]

Back in Great Recession when there were many foreclosures, bidders would go to courthouse.
Later it was learned that there was a conspiracy among the bidders in how they would not bid against each other, thus the bidders benefitted more than they should.

 

[BRCJR]

Arm’s Length Example Involving a Foreclosure Sale​

What follows is an example of an arm’s length transaction that was brought before the Ohio Supreme Court. In March of 2007, Craig Fennel, president of Fenco Development Company, filed a complaint on behalf of his company with the local Board of Revision (BOR) against an auditor’s valuation of an apartment building that Fenco had purchased the year before.

The auditor’s valuation came in at nearly $480,000. Fenco, however, claimed the property’s value was actually $135,000, which is the price that Fenco paid to the United States Department of Housing and Urban Development (HUD) when it purchased the building at a foreclosure auction.

The BOR held a hearing in September of that year, at which Fennel testified that the property had been vacant for two years, and provided photographic evidence that it was in run-down condition. He also testified that he was holding on to the property, waiting to improve on it until other properties had been improved first.

The auditor countered by submitting a report prepared by one of its staff appraisers that indicated that no one had made a sufficient claim or submitted the appropriate documentation to show that the valuation of the property should be reduced. The appraiser agreed that the condition of the property was “deplorable,” however she testified that the foreclosure sale “[did] not indicate a market sale.”

The BOR determined that the evidence proved that the run-down condition of the property had made it difficult to sell through auction, and that the final sale price had proved the true value of the property at the time that it was sold. The decision was appealed to the Board of Tax Appeals (BTA). The BTA ultimately determined that an arm’s length sale must be voluntary, and that the “public sale was carried out voluntarily by the seller.” Further, the BTA noted that the auction contained “the elements of an arm’s length transaction.”

Because the BTA ruled that the sale was an arm’s length transaction “upon which the BOR properly relied in valuing the property for tax year 2006,” the BTA affirmed that the sale price of $135,000 should be considered the true value of the property at the time it was sold.

The case was then appealed to the Ohio Supreme Court. The Court ultimately reversed the BTA’s ruling, holding that a foreclosure sale of real property does not qualify as an arm’s length transaction in an action whose sole purpose is to revalue the property before the BOR. The Court came to this conclusion by applying the logic that a foreclosure sale is motivated by the desire to satisfy one or more creditors. Therefore, this motivation could be considered a form of duress, which negates the independence expected from the parties to an arm’s length transaction.

The Court disagreed with the BTA’s finding that the HUD sale of the property could be considered “voluntary.” Instead, the evidence pointed to the fact that the HUD tried to sell the property to another bidder for $506,000, and when that deal fell through, the HUD accepted Fenco’s significantly lower bid. The Ohio Supreme Court’s ruling in this case was a landmark decision that will impact all future BOR cases going forward, which involve the selling of properties via foreclosure auctions.

 

[Artemis Fowl]

Arm’s Length Example Involving a Foreclosure Sale​

What follows is an example of an arm’s length transaction that was brought before the Ohio Supreme Court. In March of 2007, Craig Fennel, president of Fenco Development Company, filed a complaint on behalf of his company with the local Board of Revision (BOR) against an auditor’s valuation of an apartment building that Fenco had purchased the year before.

The auditor’s valuation came in at nearly $480,000. Fenco, however, claimed the property’s value was actually $135,000, which is the price that Fenco paid to the United States Department of Housing and Urban Development (HUD) when it purchased the building at a foreclosure auction.

The BOR held a hearing in September of that year, at which Fennel testified that the property had been vacant for two years, and provided photographic evidence that it was in run-down condition. He also testified that he was holding on to the property, waiting to improve on it until other properties had been improved first.

The auditor countered by submitting a report prepared by one of its staff appraisers that indicated that no one had made a sufficient claim or submitted the appropriate documentation to show that the valuation of the property should be reduced. The appraiser agreed that the condition of the property was “deplorable,” however she testified that the foreclosure sale “[did] not indicate a market sale.”

The BOR determined that the evidence proved that the run-down condition of the property had made it difficult to sell through auction, and that the final sale price had proved the true value of the property at the time that it was sold. The decision was appealed to the Board of Tax Appeals (BTA). The BTA ultimately determined that an arm’s length sale must be voluntary, and that the “public sale was carried out voluntarily by the seller.” Further, the BTA noted that the auction contained “the elements of an arm’s length transaction.”

Because the BTA ruled that the sale was an arm’s length transaction “upon which the BOR properly relied in valuing the property for tax year 2006,” the BTA affirmed that the sale price of $135,000 should be considered the true value of the property at the time it was sold.

The case was then appealed to the Ohio Supreme Court. The Court ultimately reversed the BTA’s ruling, holding that a foreclosure sale of real property does not qualify as an arm’s length transaction in an action whose sole purpose is to revalue the property before the BOR. The Court came to this conclusion by applying the logic that a foreclosure sale is motivated by the desire to satisfy one or more creditors. Therefore, this motivation could be considered a form of duress, which negates the independence expected from the parties to an arm’s length transaction.

The Court disagreed with the BTA’s finding that the HUD sale of the property could be considered “voluntary.” Instead, the evidence pointed to the fact that the HUD tried to sell the property to another bidder for $506,000, and when that deal fell through, the HUD accepted Fenco’s significantly lower bid. The Ohio Supreme Court’s ruling in this case was a landmark decision that will impact all future BOR cases going forward, which involve the selling of properties via foreclosure auctions.

This answer is better...

 

[Tom D]

it is a distressed sale, but an arm's length transaction. buyer & seller do not know each other and each is looking for their own best interest. a bidding action is like having 5 buyer's in a bidding war.
didn't we see that the last couple of years. the auction is acting as the agent, just like the realtor, for whomever.

 

[Mark K]

Depends on your definition of arm's-length. Some definitions limit it only to related parties, related by blood, marriage, business, etc. and some appraisers have always stood rigidly on this ground, right or wrong.

Other definitions include the caveat that arm's-length must be free market with neither party acting under duress.

It seems that the Ohio Supreme Court included 'duress' in their decision.

The Court came to this conclusion by applying the logic that a foreclosure sale is motivated by the desire to satisfy one or more creditors. Therefore, this motivation could be considered a form of duress, which negates the independence expected from the parties to an arm’s length transaction.

Personally I don't think a tax sale is AL.

 

[sputnam]

As appraisers, we don't get to make our own definitions of many terms. Arm's length sale is one of those. The essence of understanding arm's length is whether there is a relationship between the buyer and seller that benefits either in the terms of the sale. I doubt that you have a special relationship with the government body that is conducting the auction... and even if you did... it's an auction... you could be outbid. The lower price you may get is because it's a liquidation sale and/or a distress sale. In the case you describe.. it is arm's length.

 

[Sadie]

This answer is better...

But it long....

 

[Tom D]

BRCJR said:
The Court came to this conclusion by applying the logic that a foreclosure sale is motivated by the desire to satisfy one or more creditors. Therefore, this motivation could be considered a form of duress, which negates the independence expected from the parties to an arm’s length transaction.

they are talking about the current owner and the taking of the property. that is a distressed action. the future selling authority and auction people are acting at arm's length and were not involved in that taking. once taken, the current owner is the lender, or creditor, each acting independent.