For example, if the uncle we mentioned earlier sells his nephew the waterfront land at a fair price, which aligns with its true market value.Įnsuring Your Transaction is Arm's Length There are other instances of non-arm’s length transactions that aren’t illegal. If the property sold in a non-arm's length transaction is later subject to capital gains tax, the IRS may dispute the declared property value, as it may not reflect the true market value.Īdditionally, lenders might not approve a mortgage for a non-arm's length transaction due to the increased risk of fraud. This is illegal, of course, and is generally considered “collusion fraud.” That describes when two entities (like a buyer and seller) work together to launder or steal money. These insiders may all be working together with a plan to split the profits. The buyer then purchases the house, turns around and flips it to another seller on the same day or relatively soon afterward - for tens of thousands more. Then, the broker encourages a buyer they know to offer the lower asking price, based on that value. Maybe a real estate broker gets an appraiser to assign their property a lower value than what it’s actually worth. “Real estate flopping,” for instance, is a term used to describe when buyers and other participants take advantage of the short sale process to make a profit. Non-arm's length transactions aren't inherently illegal or unethical. The Legal Implications of Non-Arm's Length Transactions This throws off the accuracy of comparables, which are used to determine the pricing of other properties.Īrm’s length real estate transactions help to encourage fair practices and protect the greater public. When deals aren’t conducted at arm’s length, it can result in the buyer paying a lower price than the true market value. Appraisers typically rely on recent arm's length sales in the local area to establish the market value of a property. Accurate, comparable sales: Arm’s length transactions are often used as comparables in real estate appraisals.Maintain market integrity: By ensuring both parties act independently and in their self-interest, arm's length transactions reduce the risk of market manipulation or fraudulent practices.In an arm’s length transaction, the buyer and seller make decisions on the deal based on their own vested interests. Why Arm's Length Transactions Matter in Real Estate Examples may include a nephew who buys waterfront land from his uncle or a subsidiary of a parent company who purchases the land from another subsidiary of the same company. The opposite of an arm’s length real estate transaction may be referred to as simply a “non-arm’s length real estate transaction” or an “arm-in-arm transaction.” Non-arm’s length real estate transactions involve two parties who do have personal or business ties prior to the sale. The two parties have no existing personal or business ties. An example of an arm’s length transaction is a commercial buyer who purchases a river ranch from a seller they have never met. Sellers seek the highest price possible so they can make the greatest profit.Īn arm’s length real estate transaction is when the buyer and seller act independently out of their own best interest - without influencing the other party’s decisions. Buyers want to get the lowest price possible to reduce the price they must pay outright or borrow from a lender. In every real estate transaction, buyers and sellers ideally act in their own best interest.
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