Condition: Arms-length Commercial activities

[sputnam]

Imo, no marketing and prior relationship of parties makes it non-arm's length.

Disagree.. but it is another strong indicator that it might be.

 

[J Grant]

Disagree.. but it is another strong indicator that it might be.

Arms-length or non-AL can be a grey area. The client thought it was not AL, but I think it is leaning more toward non-AL, and for the OP to fight his client on it makes no sense. It just relates to the subject contract anyway and should have no on the MV opionon.

However, a subject contract not being AL can explain a difference of contract price and OMV of the appraisal

Price is not always indicative of AL or non-AL. A big clue imo is that the property was offered on the open market, or just to the one buyer the seller has a relationship with ( the subject of teh OP was not sold through MLS and was between a teacher and student ). When a propety is only offered to the one buyer, and that buyer has a relationshop, whther bueiness, close soical or family, then the price might be a MV price, however the terms of sale or conditons often are not MV terms.

For example, I appraised a house several years ago that was a sale between father and son. The price was a bit above MV. The grown son was also the tenant and present at the inspection. I mentioned to him that it did not look like he got a family discount on the price. He was in his early twenties, naive, and blurted out, "My father loaned me a lot of money, so the deal is I buy it at this price and wo; have to pay him back. " Had he not said that, I would not have known. However, the very fact of a close or family prior relatioship can mean the terms of sale or ocndiotns of sale are to a degree unknowalbe or might have aspects to them not present in an AL sale.

 

[KHS445]

My opinion only, and it is worth what you are paying for it.

1. It is an arms-length transaction. Based on what you explained, there is no real tie other than the buyer and seller knowing each other, so how is that any different than purchasing a property from an acquaintance? The lack of marketing is a separate matter, and you should include something in your comments about the lack of market exposure, so the contract price has not been market tested.

2. This sounds more like a hobby farm. As per your comments, the client has not provided you with any historical income or expense statements, nor have they given you any income and expense projections for a commercial stable. Typically, hobby farm owners take advantage of certain tax deductions that can offset the cost of their investment in the particular hobby. The income generated and the deductible expenses can be an incentive for some buyers if they have a use for the particular improvements. I would strongly recommend talking with your client, discussing your research and the results of your appraisal, and ask them how they are viewing this purchase. Is the client considering the potential income and expenses of the operation in their loan decision? If so, ask them to provide you with all the financial information and then try and find a CG that will work with you on completing the report.

Your value may be coming in low due to your giving inadequate value to the specialized improvements. If you haven't, you may have to value everything other than the specialized improvements using the sales approach and then rely on the depreciated cost approach to value the specialized improvements.

 

[J Grant]

AI Overview


A non-arms length sale is a transaction between parties who have a pre-existing relationship, such as family members, friends, or business partners, rather than being independent and acting solely in their own self-interest in the open market. These sales, often called "arm-in-arm sales," require extra scrutiny by lenders and tax authorities to ensure the sale price reflects the fair market value of the property, as the relationship can influence the transaction's terms. A "gift of equity," where the sale price is below fair market value, is a common outcome, potentially triggering gift taxes and requiring a formal gift letter.

Key Characteristics

• • Pre-existing Relationship:
    The buyer and seller are not strangers but have a personal or business connection.
    
  • Not Truly Independent:
    The parties may not be acting solely in their own best interest, potentially influenced by their relationship rather than market conditions.
    
  • Examples:
    A parent selling a home to their child, a landlord selling a property to a tenant, or two business partners selling a property to each other are common examples.

 

[J Grant]

One of the defining features of a non-AL sale is the prior relationship between buyer and seller, and that need not be family. It usually is above that of an aquantince, since normally a seller would not extend special terms or price to a mere aquantaince.

One might say the lack of open market exposure is a symptom of a Non-AL contract - one of the defining features of MV is that the property was exposed to the open market. If the seller chooses not to expose the property to the open market, it can affect the price.

 

[J Grant]

e

A non AL sale can have a "market value" range price - but the terms can be the favor -a not disclosed owner held mortgage, gift of equity, forgiveness of debt, and so on