Arm's length transaction

[rubberchicken]

Subject property is being sold from landlord to tenant. Never listed in the MLS. In our wonderful UAD form, I said non arm's length transaction. Here is the stip I received from the lender --

"appraiser states this is a Non-arms length sale. Since with FHA, tenant to landlord relationship does not create an identity of interest problem, please remove this statement."

I haven't come across this before so I figured I would ask the brain trust on AF.

Thanks

 

[Walter Kirk]

Ask the idiot reviewer if he knows what "Typically Motivated" means. A tenant purchasing from a landlord may assign a value to not having to move belongings. A landlord selling to a tenant may assign value to not having to pay a sales commission, remove a tenant, hold a vacant property, etc.

 

[J Grant]

what was the sale price? Arms length transaction is when the relationships between the parties is such that it did not affect sales price.

A landlord to tenant is a grey area that can be arms length or non arms length..if they are not blood relatives or friends, and if there are no special terms in the sales price, such as a percent of rent was applied to the sales price, it can be an arms length transaction.

If you report it as an arms length transaction, just explain in an addendum that it was landlord to tenant sale but there was no concessions or application of rent that influenced purchase price.

 

[CANative]

An arms length transaction is a transaction between unrelated parties or parties with no financial interest outside of the transaction.

Landlord to tenant is an arms-length transaction unless they are related or have a side deal of some sort.

I'd make the change but explain the details of the sale.

 

[rubberchicken]

Thanks for the replies, much appreciated to all of you.

 

[Pittsburgh Pete]

Ask the idiot reviewer if he knows what "Typically Motivated" means. A tenant purchasing from a landlord may assign a value to not having to move belongings. A landlord selling to a tenant may assign value to not having to pay a sales commission, remove a tenant, hold a vacant property, etc.

Still an arm's length transaction that may not reflect market value. The parties are not related and are acting in their own self-interest. "Typically motivated" isn't in any definition of "arm's length" that I've seen.

Clearly, one of the downsides of soliciting information on a website.

 

[Rob Frazier]

Have some fun with USPAP 2012 (see what's coming!)

You may want to consider that the definition of market value requires that you estimate the exposure time. Subject was not exposed to the market, because a deal was struck between two parties who already knew each other.

The price agreed between the parties may be similar to what you estimate as market value once the appraisal is completed, or it may indicate that the seller or tenant has found an advantage in the transaction. Does it really matter whether the transaction between them is "arm's length"? Your appraisal will address your estimate of exposure time because you are providing an estimate of market value (under the federal definition included in the standardized forms) and therefore the appraisal is based on an assumption of an an "arm's length transaction". The facts of the case (sale price decision between buyer and seller) are that the property was not exposed to the market, but that is not significant beause your market value opinion assumes that it was.

So you can say that while your appraisal estimates market value (arm's length assumption, etc.), you can't really know if the transaction was arm's length, nor does it affect your assignment results.

PS: I love it when somebody says "FHA requires" and they don't quote the handbook or mortgagee letter as proof. Makes you wonder if FHA really said that. Maybe you should ask for the source of the requirement?

 

[CANative]

Exposure time has nothing to do with "arms length transaction." And arms length transaction has nothing to do the the market value of the property under appraisal. The OPs dilemma is nothing more than a reporting problem.

 

[CANative]

PS: I love it when somebody says "FHA requires" and they don't quote the handbook or mortgagee letter as proof. Makes you wonder if FHA really said that. Maybe you should ask for the source of the requirement?

2-B-5
2. Identity-of-Interest Transactions, Continued
4155.1 2.B.2.c Exceptions to the Maximum LTV for Identity of Interest Transactions (continued)
Exception
Description
Tenant Purchase
A current tenant, including a family member tenant, purchases the property where he/she has rented for at least six months immediately predating the sales contract.
Note: A lease or other written evidence to verify occupancy is required.
The maximum mortgage calculation is not affected by a sales transaction between a tenant and a landlord with no identity-of-interest relationship.

http://portal.HUD.gov/hudportal/documents/huddoc?id=4155-1_2_secB.pdf

 

[rubberchicken]

Exposure time has nothing to do with "arms length transaction." And arms length transaction has nothing to do the the market value of the property under appraisal. The OPs dilemma is nothing more than a reporting problem.

Correct. I'm not changing anything on the report other than just wondering about the Arm's Length portion. I've changed it to arms length and wrote a quick blurb about being purchased by the current tenant.

Thanks again,