What Constitutes Arms Length Transaction?

[SmilingDog]

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

Based on Barron's Dictionary of Real Estate Terms (5th Editiion): an arms length transaction is A TRANSACTION AMONG PARTIES, EACH OF WHO ACTS IN HIS OR HER OWN BEST INTEREST.

Well, let's see in an REO or short sale are not each party acting to their best ineterest? The lender wants to get rid of the house for as much as they can and the buyer wants it for as cheap as he can get it. SOUNDS ARMS LENGTH TO ME.

In fact Barron's goes further to state that transactions NOT considered arms's length would be a sale:

*** between husband and wife
*** a father and son
*** a corporation and one of its subsidiaries


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.

 

[Mountain Man]

Arms length transaction is a sale between unrelated parties, both parties acting in their own best interest, neither under stress or duress to complete the transaction. Your boiler plate looks good to me.

 

[Metamorphic]

The Baron's definition doesn't include the distress element. Is that distress factor covered in the "reasonable exposure to the market" idea that's usually part of what makes a good comp.

 

[jakeboeger]

I would change "Foreclosures" to "Bank Owned" or "REO".

 

[Pat Butler]

My thoughts exactly. Too many people expand the definition of arm's length to include other factors besides the related part. Nonetheless, even if a transaction is arm's length, there might be other factors that make it a bad comp.

I've also said many times that REO sales can be good comps if they sold near market value. It isn't always the case that lenders want to unload their properties and lose money.

 

[Mztk1]

I use 'arm's length' as synonymous with 'market value transaction' and to be a market value transaction it has to fit the definition of market value in the report. If it is a bank sale or an REO I can just as easily say it is not at arm's length as say it was not a market sale. Here's how Merriam-Webster's Law defines it (cut and paste):

Merriam-Webster's Dictionary of Law: Arms Length-Function: noun
: the condition of the parties to a business deal in which each has independent interests and one does not dominate the other —often used in the phrase at arm's length <a contract made at arm's length> —arm's–length adjective

So I don't think I am incorrect nor guilty of over-expanding the definition, especially when it can also mean:

Dictionary.com Unabridged (v 1.1) –adjective not closely or intimately connected or associated; distant; remote: an arm's-length relationship.

Which does not require a consanganeous relationship but merely a close relationship, between friends let's say.

I don't think we should be parsing each and every phrase. Words are tools of understanding. If Joe and Bill are friends and Bill buys from Joe and you call it a non-arms length transaction, the word functions just fine and no one is going to read it wondering if they are father and son, nephew and uncle or husband and husband in some states. The message that it was not a market transaction is conveyed.

 

[Carnivore]

If your using a Fannie Mae form then look at your "Defintion of Value" for your answer.

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Now the very tough question from me. If the client is asking you that question. What have you been doing all this time?

 

[NC Appraising]

SG,

What is the difference in these two scenarios?

1. A seller has their home on the market for 100 days (150,000), and he has to sell their home now due to a new job, buying a new home that is under contract, a divorce, in an estate sell and one family member wants the money now, so in a time of desperation, they take a lot less for their home than they normally would.
sold (125,000)

or

2. A local bank has accumulated several REO properties, and all of them started out being listed (150,000) in sink with other com parables properties in the neighborhood. The banks had even went in and did some minor cosmetic maintenance. After not selling, (100 dom) the bank needed to get them off their books, so they lowered their list price and took less than what others comparable properties were selling for. (125,000)

Pat and Carni has it right:

I've also said many times that REO sales can be good comps if they sold near market value.

It's all about the definition of Market Value that your using.

 

[Mike Boyd]

You have to know what the average marketing time is in the neighborhood or community. Let's say the average time is less than 90 days. So, if it takes 120 days for a specific property, it might be overpriced or there is some other factor inhibiting a sale. (like a tenant who does not want to move telling a prospective buyer that the neighbor is a child molester). An REO listing can start out overpriced. I have seen that many times, just as I have seen a regular listing start out overpriced.

 

[LA Woman]

How would a house sold at Auction fit into this discussion? I've heard appraisers say that auction sales aren't arms length and but more that they are. I consider them arms length, am I wrong?