Tenant Landlord relationship

[J Grant]

What is an Arm’s Length Transaction? - Appraisal Buzz

What is an arm’s length transaction? The question seems simple enough, right? Just mentioning it on an appraiser blog creates a flurry of debate over what exactly is an arm’s length transaction. While doing research for this article, it evoked a lot of emotion from my peers. Everyone has an...

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[Denita Neuenhaus]

Yes, especially if rent is taken off the price. I have seen a lot of deals where the seller (usually a builder) rents a house to someone for a year and after a year, they can buy the house for a set price with the rent deducted. And if they don't buy the rent contract expires.

That only works if the property is financed by the seller and not a traditional mortgage. There are limits to the percentage of rent allowed as a credit toward buyers purchase. Last time I checked (which has been a couple of years now) the amount allowed to be applied to the purchase price as a credit is the excess rent payment over the market rent. Otherwise the lender simply won't allow the credit.

 

[Carnivore]

Just want a little clarity on my opinion here. Does only the fact that a landlord is selling to a tenant constitute a non arms length transaction just because they are considered related parties (via business relationship)? I would say no if there were no other signs of undue influence. There is obviously no requirement to to buy or sell that can be forced without specific prior arrangement. One could say there may be incentives for that sale, such as not having to move for the tenant, or a landlord selling to current tenant to avoid having to find a new tenant or having the property sit vacant. However, if a property appears to be selling at fair market value and you find no undue influence, would you consider it non arms length just because of the tenant/landlord relationship?

TLDR:
Is tenant/landlord a related party?

I don't know the reason why your asking the Question. Is this for a specific Assignment or just Academic?

If its for a Specific Assignment then we need a lot of details.
OTOH
The Academic General Answer is; Maybe or Maybe not. It really depends on the Intended User/Use of the Appraisal

Here is an example/scenario of Why this can be so important. Lets say the Seller is 'Dad' and the Buyer is 'Son'.

The intended User is Dad, the Intended Use is two fold. a. Capital Gains B. Future Interest Income to Dad, Plus C: Son's Future mortgage Interest deduction on his income tax return.

"Imputed interest is interest that a lender(Dad) is assumed to have received and must report as income on their taxes regardless of whether they received it. It applies to family loans and other personal and business loans extended at no interest or an interest rate the IRS considers to be too low."

Both Parties Dad and Son are engaging in what someone might say potential Tax Fraud.

If you as the Appraiser do not follow USPAP then YOU are now a Party to the Scheme

This is a Great Read for your question: https://propertymetrics.com/blog/understanding-arms-length-transactions/

 

[Carnivore]

So lets take this assignment but it is changed in Facts Revealed to you by the Client. If all he wants is an Appraisal of a House he owns and even after your Interview he doesn't reveal the Existence of a Contract to Purchase. Then all you know is he wants to know the MV on mutually agreed to Effective Date because he is thinking of Selling. Typically the Date of Inspection. You will or should have an Engagement Letter spelling out all these Details. The person at the house is his son to let you in. You know nothing about what he is trying to do, except he revealed that he is THINKING of Selling. That's IT! Behind the Scene him and his son are scheming.

For you this is easy. 1. You have your Engagement Letter and it STATES The Intended Use and Intended User. 2. most importantly all of this is in your WORK FILE!

Back to your Original Question. Answer; Maybe - Maybe Not!

 

[The Warrior Monk]

Here is an example/scenario of Why this can be so important. Lets say the Seller is 'Dad' and the Buyer is 'Son'.

For all practical purposes, this is never treated as an arm's length transaction. This would also be the case if these two parties were shielded behind corporations, or even the transaction is between corporations with common shareholders.

 

[sputnam]

It may or may not be an arm's length transaction. Simply the fact that the Buyer and Seller know each other doesn't make it non-arm's length. Is the tenant or the landlord getting some advantage in the sale that wouldn't be there if they were complete strangers? Is the tenant/buyer getting a below market deal? Is the landlord/seller somehow getting an above market deal?

 

[RCA]

Just want a little clarity on my opinion here. Does only the fact that a landlord is selling to a tenant constitute a non arms length transaction just because they are considered related parties (via business relationship)? I would say no if there were no other signs of undue influence. There is obviously no requirement to to buy or sell that can be forced without specific prior arrangement. One could say there may be incentives for that sale, such as not having to move for the tenant, or a landlord selling to current tenant to avoid having to find a new tenant or having the property sit vacant. However, if a property appears to be selling at fair market value and you find no undue influence, would you consider it non arms length just because of the tenant/landlord relationship?

TLDR:
Is tenant/landlord a related party?

There is conceptually the possibility of investors to arrange a sale at well-over market value to spur a change in MV for a certain kind of property they have invested in.

So, let's say, we have a condo-complex for which analysts have good supporting arguments could sell for 30-40% more. A rare thing indeed. But you can find these oddities occasionally if you look around. They may be right under your nose. But you need to know real estate, like a good experienced real estate broker for the area. Typically they are in areas where demand is slowly steadily increasing, where money is available, and where certain trends have slowly and quitely moved the complex forward into an "exclusive" area. But, since appraisers get locked into historical market values, the real estate values have not moved in step with demand. There can be a number of reasons for this. The market just needs a good kick in the shines to make the jump. That's where the informal conspiracy comes in. Get an appraiser, a broker and a seller in collusion and you can do it. One might argue it is really legal for said reasons. It's a grey area, IMO. The real test is whether the new sale price will hold up over time.

 

[J Grant]

It may or may not be an arm's length transaction. Simply the fact that the Buyer and Seller know each other doesn't make it non-arm's length. Is the tenant or the landlord getting some advantage in the sale that wouldn't be there if they were complete strangers? Is the tenant/buyer getting a below market deal? Is the landlord/seller somehow getting an above market deal?

Though some situations may be a grey area, there has to be some basis for the definition, and nearly all definitions of non AL say a determining factor is there is a relationship between parties (family/ business, friends, other)

The analysis of the transaction may reveal no special terms and/or that the price was "market value " , but the transaction is still non AL because of the relationship.

One thing shared by majority of non AL transactions is regardless of whether it turns out we think the price is "market value", the property itself was not exposed to the open market or offered to other buyers. Therefore we do not really know what alternate price the open market would have brought or what other buyers might have paid.