Non-arms Length Sale?

[Tumbuktu]

• Property was not listed
• Purchase Agreement is on Plain Paper
• Seller is 'Father' and buyers are 'Children'

1). Irrespective of the Sale Price, would the above information be enough for the sale to be considered 'Non-Arms Length Sale'

OR

2). It will be considered 'Non-Arms Length Sale' only if in addition to the above, the Sale Price is well below the Market Price?

As always, guidance and feedback would be appreciated.

 

[James Micozzi]

• Property was not listed
• Purchase Agreement is on Plain Paper
• Seller is 'Father' and buyers are 'Children'

1). Irrespective of the Sale Price, would the above information be enough for the sale to be considered 'Non-Arms Length Sale'

OR

2). It will be considered 'Non-Arms Length Sale' only if in addition to the above, the Sale Price is well below the Market Price?

As always, guidance and feedback would be appreciated.

Arms length transaction- it is a dealing between independent, unrelated, and well informed parties looking out for their individual interests. Transactions involving family members, and parent companies and subsidiaries, are deemed arm-in-arm dealings. To qualify as an arm's length transaction, neither of the involved parties may have any interest in the transaction's consequences to the other party.

 

[Jerry Bone Jr]

• Seller is 'Father' and buyers are 'Children'

= non-arms length

 

[Addie]

Depends. Who is this for? FNMA and USPAP or USPAP and client only?

FNMA says relationship = non-arms length nothing else even needed.

USPAP/client. You can cite contract law or investment definition which just has a qualifier of acting independent. You would need to discover if they are or not. Controlled, subordinate, etc. be a lot of work to discover.

For it to be arms length though, you’d prob have to show proof of how they got to their sale price. If was via a 3rd party unaffiliated, you’d be good to go such as an appraiser and have backing for arms-length under contract law.

https://www.fanniemae.com/content/guide/selling/b2/1.2/01.html

 

[Michigan CG]

• Property was not listed
• Purchase Agreement is on Plain Paper
• Seller is 'Father' and buyers are 'Children'

1). Irrespective of the Sale Price, would the above information be enough for the sale to be considered 'Non-Arms Length Sale'

.

A property does not have to be listed for sale to be arms-length.
A purchase agreement can be on anything including a grocery sack and still be arms-length
Seller being father and buyer being children is the thing that makes in not arms-length.

Depends. Who is this for? FNMA and USPAP or USPAP and client only?

What? There is no depends.

Definition of Arms-length transaction from the Dictionary of Real Estate Appraisal 6th Edition:

A transaction between two unrelated parties who are each acting in his or her own best interest.

 

[spittman]

2). It will be considered 'Non-Arms Length Sale' only if in addition to the above, the Sale Price is well below the Market Price?

Because of the relationship, it is 'non-arms length' regardless. Any time I find out the the buyer/seller know each other, (ex. relatives, friends, coworkers, tenant) I make note of it. In my experiences, the price will not be far off market value, but in some cases, the price has been significantly discounted in which case could have legal implications come tax time. Just know that when you are appraising these types of transactions that a judge or the IRS may be looking at your appraisal some time in the future.

 

[TRESinc]

Depends. Who is this for? FNMA and USPAP or USPAP and client only?

FNMA says relationship = non-arms length nothing else even needed.

USPAP/client. You can cite contract law or investment definition which just has a qualifier of acting independent. You would need to discover if they are or not. Controlled, subordinate, etc. be a lot of work to discover.

For it to be arms length though, you’d prob have to show proof of how they got to their sale price. If was via a 3rd party unaffiliated, you’d be good to go such as an appraiser and have backing for arms-length under contract law.

https://www.fanniemae.com/content/guide/selling/b2/1.2/01.html

stop disseminating false information. it does not have any dependence on who the client it. the parties are related, it is not an arm's length transaction. period.

 

[J Grant]

Non arms length is a relationship between the parties ( basically). Such that the relationship could impact the price and or terms...even if the price is "market value" ( more correctly, your opinion of market value)

I did a non AL sale parents and children, the price was OMV but the parents gave them the down payment ( gift of equity). Even if all the terms are AL and the price is MV, the fact that there is a relationship between buyer and seller, in this case father and child, means it is not an AL sale. Not normal market exposure or no open market exposure often goes along with a non AL sale.

 

[J Grant]

• Property was not listed
• Purchase Agreement is on Plain Paper
• Seller is 'Father' and buyers are 'Children'1). Irrespective of the Sale Price, would the above information be enough for the sale to be considered 'Non-Arms Length Sale'

OR
2). It will be considered 'Non-Arms Length Sale' only if in addition to the above, the Sale Price is well below the Market Price?
As always, guidance and feedback would be appreciated.

It's a misconception that a non AL sale SC be below Market price..I remember 2 occasions the SC price between related parties was substantially above Market price -they were trying to game the system and get cash back to the seller from a higher mortgage,

 

[Mark K]

Its non-AL. Period.

It may or may not be a market value transaction but there is no option on AL vs. non-AL in this instance.

If, due to the family relationship, its selling below market value indicated by the comps, you'll have to discuss this in the appropriate section of the report.