Arms Length Transaction Policy

[twoblack9s]

Hello Everyone. I was wondering if anyone could clarify the fannie mae "arm lengths transaction" policy.

My parents have agreed to sell me one of their rental houses as an investment. The following are all relevant details of the transaction:

-House was purchased by my parents for 77k cash about 3 months ago as an investment property
-With renovations, house is now believed to be valued between 90-95k
-They have agreed to sell it to me for 80k, of which I would put 20% down and take out a loan for the remainder of the 64k owed
-There is a renter in the house currently ($1150/month), and I would NOT be living in the house, it would be treated as an investment house for me.
-The house is located in Michigan, I am located in Florida where I am currently employed and a resident of
-I have good credit history and good income

The main difficulty that we are facing is that the house was purchased 3 months ago and 1 banker we talked to seems to think that "arms length transaction" laws prevent me from purchasing the house until they have had it for a year. Other people we talked to didn't seem to know anything about it but said it was possible. Does anyone know if this law would restrict me from buying the house from them? Is there a certain price that they are legally allowed to charge me for the house being that I am a direct relative?

Any input is greatly appreciated.

 

[CANative]

An arms-length transaction is a transaction where a buyer and a seller have no relationship (familial, business, etc.) outside of the transaction.

The transaction between you and your parents would not be an arms-length transaction and the details you have posted are a great example of this. They are selling you a $95,000 property for $80,000 due to their "love and affection" for you. This affection is outside of the transaction itself and influenced the sale price in a downward direction.

But I don't see what any of that has to do with what you are asking. There is no "law" against transactions of this type. They happen thousands of times each day.

It may have an affect on some loan programs but you can't know that until you or a loan agent or broker go through all of the information and programs available. You may be thinking of the rules about flipping property (buy, fix and sell in a short period of time for a profit.) Some lenders don't care while others care a great deal. Again, you need to discuss with a loan professional in person and not on the internet.

 

[Randolph Kinney]

Hello Everyone. I was wondering if anyone could clarify the fannie mae "arm lengths transaction" policy.

My parents have agreed to sell me one of their rental houses as an investment. The following are all relevant details of the transaction:

-House was purchased by my parents for 77k cash about 3 months ago as an investment property
-With renovations, house is now believed to be valued between 90-95k
-They have agreed to sell it to me for 80k, of which I would put 20% down and take out a loan for the remainder of the 64k owed
-There is a renter in the house currently ($1150/month), and I would NOT be living in the house, it would be treated as an investment house for me.
-The house is located in Michigan, I am located in Florida where I am currently employed and a resident of
-I have good credit history and good income

The main difficulty that we are facing is that the house was purchased 3 months ago and 1 banker we talked to seems to think that "arms length transaction" laws prevent me from purchasing the house until they have had it for a year. Other people we talked to didn't seem to know anything about it but said it was possible. Does anyone know if this law would restrict me from buying the house from them? Is there a certain price that they are legally allowed to charge me for the house being that I am a direct relative?

Any input is greatly appreciated.

Your problem is "property flipping". For example, FHA has a requirement that 2 appraisals need to be done in order to fund the loan for properties that are resold in less than 3 months. In addition:

To protect FHA borrowers against predatory practices of
"flipping" where properties are quickly resold at inflated
prices to unsuspecting borrowers, this waiver continues to
be limited to those sales meeting the following general
conditions:
All transactions must be arms-length, with no identity of
interest between the buyer and seller or other parties
participating in the sales transaction.
In cases in which the sales price of the property is 20
percent or more above the seller's acquisition cost, the
waiver will only apply if the lender meets specific
conditions.

 

[Terrel L. Shields]

For certain kinds of financing, the lenders balk at loaning on such houses in fear of a "flip"...

 

[sputnam]

The situation you describe is not arms length. The sales price could be at or near market value. Non-arms length doesn't automatically mean below market price (or above it).

 

[Mike Garrett RAA]

As long as everything is disclosed there is no reason this property would be ineligible for financing. Appraisers need to be sensitive to non-arms length transactions because those sales may or may not be a good indicator of market value.

 

[JSmith43]

You need to talk directly to a LO, giving him this information up front. Fannie & Freddie bound loans are now subject to the 3 month anti flipping rule described earlier. I'm not sure if it is an investor overlay or a F & F change & I'm not going to look it up

There is the anti-flipping aspect and a general underwriting consideration labeled "identity of interest." The terms may sour a bit, which they already have for the investor status that a NOO scenario takes on. You may get different terms if your down payment exceeds, say 30%.

I'm no longer current on this stuff. Get a couple different opinions. Steer clear of the big banks. A big Credit Union may have several places to sell the loan & maybe one will offer favorable terms. That said, there are probably still a whole lot of LO's making "mistakes" in this environment, due to the built in uncertainties of UW & investor agreements. So, if you look long enough and one finally says yes, it might be a mistake