What Constitutes Arms Length Transaction?

[LA Woman]

Auctions = Deals? Sometimes

I've never been to one, but even if as you're saying, you're seeing "investors" who think they're buying cheep, not buying cheep, but instead paying market value, that seems to be odd way to get to market value. Since the market value definition ususally includes the whole bit about "knowledgeably, and prudently" and not under duress. Its just hard to imagine that if the properties going at auction are not a deal, what's the motivation to go through the pressured auction process. It just seems aberrant for that to be a market price process.

In my area at least, there are few "deals" due to our rapidly declining market.....what something is "worth" changes every 15 minutes. And the beginners dont know that yet, but they will soon.

The professional investors of course are usually the ones getting the deals, because they have done their homework, have been in this business for a while and know what they are doing. They know what the home is worth today, what it will be worth next month when the deal closes and they know what it will be worth after repairs and holding costs when they try to resell it or rent it.

We are now at price point in a lot of neigborhoods where many of these properties will provide a positive cash flow, and I see investors (not at auctions mind you), scooping up lots of properties.

I know of one investor who went to an auction to bid on about 400 homes....he ended up purchasing only 11, but at the end of the event, only got 6 because they sold below what the reserve was. So 6 out of 400 were "deals".

With that said, the smaller and inexperienced Auction houses, thats were you may find your deals...but it is a lot of time to invest to buy at an auction. Most investors buy directly from the bank or from the homeowner.

Check out some open houses in the neighborhoods you know like the back of your hand...then check out what the sell for....your neighborhood may be different from mine, maybe there are people getting deals, but not many in my area.

 

[LA Woman]

How to tell if home sold at Auction?

How often are you putting auction sale comparables in your report? I never have but I've only been appraising for seven years.

I imagine that you would have to find out why the property is being auctioned. Is the marketing time reasonable at an auction? Is it actually on the market? Who are the buyers. Are they typical to your market?

These questions, and more, lead me to believe that it is not a good market sale for comparison. Unless the purpose of the appraisal is to determine your asset value for auction. Just thinking aloud.

Joe, do you know of any data source that indicates and "auction" sale? I don't. The only way I know of telling if a comp sold thru an auction is to pick up the Auction Booklets of their homes and see if my comp was listed in their books and then calling the MLS agent -that is if was listed with MLS and they will take the time to speak to me. If you know of another way/source, please share. Thanks.

 

[Stone]

What I'm getting from this is that some appraisers have pre-conceived notions of auction sales and they wish to hold onto those notions.

 

[LA Woman]

Arm Length Transaction response

Lately I'm getting conditions to state whether or not the sales are "arms length" transactions.

I've now started to boilerplate this statement for the U/W:

BARRON'S DICTIONARY OF REAL ESTATE TERMS (FIFTH EDITION) DEFINES ARMS LENGTH TRANSACTION AS "A TRANSACTION AMONG PARTIES, EACH OF WHO ACTS IN HIS OR HER OWN BEST INTEREST". THEREFORE, UNLESS THE PARTIES ARE RELATED AS IN A FAMILY OR EMPLOYEE/EMPLOYER RELATIONSHIP, A TRANSACTION IS DEEMED TO BE "ARM'S LENGTH" BY DEFINITION.

THUS, BASED ON THE PUBLIC RECORDS TRANSFER HISTORY AND MLS RECORDS THE SALES USED IN THIS APPRAISAL WERE CONSIDERED "ARMS LENGTH", AS THERE IS NO EVIDENCE TO THE CONTRARY. THERE WAS NO EVIDENCE FOUND TO SUGGEST THAT THE TRANSACTIONS OF THE CLOSED SALES WERE BETWEEN RELATED PARTIES.

FURTHERMORE, THE SALES AND LISTINGS DO NOT APPEAR TO BE SHORT SALES OR FORECLOSURES. IN ANY EVENT SUCH SALES ARE STILL CONSIDERED ARMS LENGTH BASED ON THE DEFINITION OF THE TERM AS DEFINED IN BARRON'S DICTIONARY OF REAL ESTATE TERMS (FIFTH EDITION).

Any thoughts? Comments? Raves? Rants? And they still talk about lender and appraiser reforms. What a joke.[/quote]

Here is something similar that I include in my reports regarding Arms Length Transacstions:

The comparable sales included in this report were obtained from public records and MLS when listed with MLS. They are assumed to be arms length transactions and any creative financing or creative selling are unknown to this appraiser unless stated. Active and contract listings (pending sales) were also researched to support current marketing conditions. When possible, real estate agents were contacted to verify MLS data. the information supplied by MLS, real estate agents and public records are assumed to be accurate and correct. The appraiser does not have access to and was not supplied a copy of the contract on these comparables sales nor their escrow instructions. Therefore, the comparable sales included in this report are considered to be accurately reported and representative of current marketing conditions. Our opinion of estimated value is based on the data supplied by public records and the MLS.

 

[SmilingDog]

The reason I quote a specific reference book source including the edition is that in litigation work you will need to provide what the source of the reference you used as a measure of the notification to the intended users of the report. You are in fact indicating to the reader what your parameters were and what source was used to support your rationale.