What is an arm’s length transaction?

Quick insights

• An arm’s length transaction in real estate is a deal involving a buyer and seller with no preexisting relationship.
• Non-arm’s length transactions are when the buyer and seller involved have a relationship, such as business partners, friends or family members.
• The independence of each party in an arm’s length transaction can help prevent conflicts of interest and complications during a sale.

In real estate, the integrity of a transaction can make or break a deal. Plus, many buyers and sellers usually want a deal to happen at a fair price. When navigating the real estate market, understanding arm’s length transactions can be useful.

What does an arm’s length sale mean in real estate?

Arm’s length transactions are deals in which both parties act in their own self-interest, independently. The parties have no prior relationship and negotiate terms based on market conditions. This can ensure an agreeable sale that reflects the true market value of the property.

What’s the difference between an arm’s length transaction and other sales?

Sales that involve parties with personal connections are generally referred to as non-arm’s length transactions. These occur when a buyer and seller have a prior relationship before a home sale. The parties could be friends, family members, business partners or have some other relation. Distressed sales, such as foreclosures or short sales, are typically considered non-arm’s length transactions, as well. This is because a seller is experiencing financial hardship. These sales may not reflect true market value and can involve added risks and complexities:

• Financial distress: The seller’s urgent need to sell can result in a lower sale price.
• Increased risks: Buyers may face hidden issues like liens, unpaid taxes or property damage.
• Professional advice: Buyers should consult experts to navigate the complexities and ensure a fair transaction.

What are the typical conditions of an arm’s length transaction?

An arm’s length transaction is characterized by key conditions that ensure fairness and impartiality between the parties involved:

• Good faith: Both parties negotiate honestly, with no intention to deceive or manipulate the deal.
• Fair market value: The price can reflect the true market value of the property, determined by market conditions and home appraisals, not personal relationships.
• Independent negotiation: Each party acts in their own best interest, without undue influence or bias from the other.
• Transparency: All terms and conditions are openly disclosed, ensuring both parties have full knowledge of the deal.

Why are arm’s length transactions important?

Arm’s length transactions can help protect buyers and sellers from undervaluation or overpayment. By having intermediaries and no personal relationships, parties are more likely to be treated fairly, without any favoritism or bias. By keeping negotiations independent, as well, an arm’s length transaction can reflect accurate property values at true market conditions. Plus, lenders can trust that the property’s value and terms are genuine, making financing decisions more straightforward.

In summary

Arm’s length transactions can help create transparency and eliminate bias in real estate. Working with qualified professionals, such as real estate agents or attorneys, helps ensure a home sale is conducted fairly. Non-arm’s length transactions between parties who already have a relationship can introduce conflicts of interest. Negotiations and the sale price may not reflect true market value.

Arm’s length transactions play a crucial role in maintaining a healthy, trustworthy real estate market. When in doubt, prospective homebuyers can seek expert guidance to from real estate pros or Home Lending Advisors.