What is an Arm’s Length Transaction?

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 opinion and many believe their opinion is the correct one.

The Appraisal of Real Estate, 13th Edition, published by the Appraisal Institute, states that an arm’s length transaction is “a transaction between unrelated parties under no duress. The common definitions of market value usually set out the criteria for an arm’s length sale in detail (1).” On the page prior to this definition in this text, it reads, “Sales that are not arm’s length market transactions (in accordance with the definition of market value used in the appraisal) should be identified and rarely, if ever, used (1).”

In the new FHA/HUD Handbook the definition of arm’s length transaction is, “An Arm’s Length Transaction refers to a transaction between unrelated parties and meets the requirements of Market Value.” This is where the lines get blurred. Grandma can sell me her home at market value, under no duress, and it is not arms length but can be at market value. A property that sells for less than market value may occur because it is under duress, such as REO, but it is not between related parties. They can be mutually exclusive. They are not interchangeable terms.

Simple examples of a non-arm’s length transaction are buying a home from someone you have a relationship with (like a family member or a friend). More complex transactions typically involve builders, developers, “flip” transactions, properties being held in trusts or corporations and being sold to the trust or corporation owner. Other examples include real estate agents selling properties to themselves, etc. It is important to examine the relationship of the buyers and sellers to determine whether or not the transaction is arm’s length.

A good illustration of this involved a vacant land sale in Sedona, AZ that I discovered while researching sales for a vacant land appraisal. The sales price was $800,000 in a market of typically $200,000 properties. To add to the complexity of that sales price, the property backed to a highway and medical center, which would typically adversely impact market value, not add to it. Turns out the developer sold the lot to himself to create comparable sales.

To complicate matters, some State assessor’s offices list REO transactions as “non arms length” when they simply should be listed as REO. There are other influences on value aside from being between related parties.

This article is relatively short on a topic that can be written about at length (no pun intended). There is a lot more that can be said about arm’s length transactions but hopefully this has cleared up some of the ambiguity. I invite any constructive comments and feedback. As appraisal professionals, we all need to continue to evolve, grow and learn from one another in a positive arena.

If you have any comments or would like to submit content of your own email comments@appraisalbuzz.com.

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About Julie D. Friess, SRA

Julie D. Friess, SRA
Julie D. Friess, SRA has a BS in Finance from SUNY Buffalo and a MA in Clinical Psychology from North Central University. She began appraising in 1988 on Long Island, NY and moved to Northern AZ in 1995. She is an SRA Designated, Certified Residential appraiser, AQB Certified USPAP instructor who is currently licensed to appraise in 4 states. Her present accolades include managing director of the Northern Arizona franchise for IRR Residential, national CVR trainer for Bradford Technologies, column writer and instructor for the AZ School of Real Estate and Business in Scottsdale AZ, President of CoAA (Coalition of AZ Appraiser), present Board Member of AAREA (Arizona Association of Real Estate Appraisers, CRN member, Appraisal Institute Mentor, and traveling USPAP and CE course instructor.

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3 comments

  1. Avatar

    Not sure I totally agree Julie. Is market value a litmus test for the arm’s-length definition? What about a divorcing couple selling their home in the MLS? Is that duress OR could they still be acting in their own best interest?

  2. Avatar

    Is a sale between tenant and landlord an Arms Length Transaction?

  3. Avatar
    William Appleton

    I have caught my mortgage company “Wells-Fargo” in my phone. I looking up the routing numbers on the backs of the cancelled checks and found the routing number 031000011 the routing number was the Government Technology Services Incorported (GTSI) until September 10, 2012 then the routing number became “Wells Fargo” This is outrageous the GTSI does court ordered and illegal wiretap equipment for government agencies. Everybody keeps saying it is the Ramsey, NJ Police robbing people again. There is nothing you can do about it. As soon as you contact a lawyer their phones and computers are sabotaged and callers voices are impersonated causing major problems. Look this stuff up yourself (“Wells Fargo N.A.) National Association. No one in their right minds will go after these thugs they will sabotage everything with the Police Department

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