Arms-length Transactions

[SteveSpy]

Hi All:

I know this has been discussed before, but wanted some new input if you could be so kind!

Having a little debate regarding Arms-Length Sales.

If completing an assignment using a FNMA 1004 form with the Stated Definition of Market Value which contains 5 criteria for an Arms Length Transaction; is it correct to identify a transaction that fails even one of the five criteria as Non-Arms-Length?

• 1. buyer and seller are typically motivated;
  
  
• 2. both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
  
  
• 3. a reasonable time is allowed for exposure in the open market;
  
  
• 4. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  
  
• 5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
  

The source of the debate: Owners are going through a divorce. A buyer knocks on their door and says they are looking to buy property in the area. The owners were wanting to sell. They negotiate and consummate a deal.

IMO, the Sale fails #1 and #3. So is it Arms-Length?

What if they placed a FOR SALE Yard Sign out front? Does it change the equation?

What if they were not Divorcing AND had a Yard Sign? Move the needle?

Thanks!

 

[J Grant]

AL vs non AL is different than meeting the terms of sale of the market value definition. Very few sales perhaps meet strictly every single qualifying term perfectly within the MV definition. We as appraisers use those terms to vet sales as comps as well as vet a subject SC.

Back to AL vs non AL, look it up, several definitions floating around but most concentrate on the fact that non AL there is a relationship between the parties outside the transaction, such relationship could affect terms or price. Relationships such as family, close friends, boss and employee , a sale between 2 business partners etc.

Your example is limited advertising and limited market exposure, but it's an AL sale (someone sees a sign for sale out front and knocks on the door). The interested buyer has no relationship with the seller. If the seller because of divorce is motivated for a fast sale or low price, comment on that, but it is still an AL transaction.

 

[hastalavista]

I agree with JGrant:

The elements that are required for a market value transaction are not the same elements that define an arm's length transaction.

In sum (and IMO), a non-arm's length transaction is created when the parties are related by a business interest or blood (and, let's not get ridiculous and say, "what about 8th cousins...?").

Two business partners transacting on a property is not an arm's length transaction. The relationship is business.
A landlord and tenant transacting on a property is not an arm's length transaction. The relationship is business.
A mother/daughter transacting on a property is not an arm's length transaction.

You can imagine in those three examples, each of the 5-elements cited in the definition of market value could be valid.

The trigger for arm's length/non-arm's length are not those 5-elements; the trigger is the relationship between the parties.

 

[Terrel L. Shields]

"what about 8th cousins...?").

If so there are no arms-length sales in the Ozarks or Appalachia.

 

[Vermonter]

If so there are no arms-length sales in the Ozarks or Appalachia.

Or my coverage area in VT

 

[Lee Lansford]

Hi All:

I know this has been discussed before, but wanted some new input if you could be so kind!

Having a little debate regarding Arms-Length Sales.

If completing an assignment using a FNMA 1004 form with the Stated Definition of Market Value which contains 5 criteria for an Arms Length Transaction; is it correct to identify a transaction that fails even one of the five criteria as Non-Arms-Length?

• 1. buyer and seller are typically motivated;
  
  
• 2. both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
  
  
• 3. a reasonable time is allowed for exposure in the open market;
  
  
• 4. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  
  
• 5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

The source of the debate: Owners are going through a divorce. A buyer knocks on their door and says they are looking to buy property in the area. The owners were wanting to sell. They negotiate and consummate a deal.

IMO, the Sale fails #1 and #3. So is it Arms-Length?

What if they placed a FOR SALE Yard Sign out front? Does it change the equation?

What if they were not Divorcing AND had a Yard Sign? Move the needle?You

Thanks!

You are citing elements of the definition of Market Value. These are not a definition of "arm's-length transaction".

 

[SteveSpy]

Agreed...

But does divorce = duress(in real estate terms )?

Is there an element of "unknowledgeable participant(s)" in this scenario?

OR is party relation the ONLY required test? Just askin'!

 

[Elliott]

Doesn't strike me as arms length. Aren't there better sales with a list price, normal exposure to the market, days on market? Use them first, then use the divorce and put an askerisk by it and explain.

 

[J Grant]

Prior relationship between parties such that it could affect price or terms is the defining feature of non AL. Some defintions include duress, which I always thought odd and not relevant.

Usually, non AL sales lack exposure to open market but that's not the defining feature of them but certainly should be commented on. A non AL sale could even sell for a "market value price", though that's not a term I would use, more like it could sell for a price in line with other similar prices. However we can't know the terms in these situations, the price may be in line with market or above and the seller is forgiving a debt by the buyer to them, for example as part of transaction . Non AL do not always sell at a low price, though they often do if one relative or long time friend is helping the other. We see gift of equity in those cases, down payment gifts, or special term seller held mortgage etc.

 

[Lee Lansford]

Some folks continue to add to the definition of "arm's-length transaction". The definition, from one well-respected and authoritative (IMHO) dictionary of appraisal terms:"A transaction between unrelated parties who are each acting in his or her own best interest."

What I see from some folks is a compulsion to twist the definition of "arm's-length transaction" to include virtually all of the elements of the common definition of Market Value. The two definitions are not one and the same. My advice to those who want to make the two virtually the one and same definition--Stop it!