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What are 'arm's length' real estate transactions?

Whether you are buying your first home or selling one that you lived in happily for many years, any residential real estate transaction can be very emotional and personal in nature. Therefore, Davie residents may be surprised to hear that real estate transactions are generally "arm's length" transactions, so that they can be fair to both parties involved in the sale, and also so that they can be legitimate.

A real estate transaction is an arm's length transaction when both parties to the transaction put their own interests first and aim to get the best deal possible. Buyers want to pay as little as possible, while sellers want to make as much as possible on the sale. In the end, though, both parties usually compromise and the property is sold at its fair market value.

So, what kind of real estate transactions are not arm's length transactions? This is a little more difficult to discern. For example, if the buyer and seller are close to each other (for example, a parent selling to a child), it can be hard to tell if they're truly putting their own self-interests first. Two red flags, though, include situations when one side is significantly more powerful than the other, or when the parties have a close relationship in a way that they're cooperating to put their joint interests first.

Non-arm's length transactions can have certain requirements and consequences. For example, in order for the sale to go through, both parties may need to clarify their relationship in an affidavit, for example, that states there are no shared business interests or hidden terms. A mortgagor may also want to see that the property was independently appraised and that a comparative market analysis was conducted to ensure that the property was sold for a price that reflected its fair market value. Finally, a non-arm's length transaction could be seen as a gift or capital gain, and, therefore, be taxed accordingly.

Non-arm's length transactions are not in and of themselves against the law, and, in some cases, are even a good idea. However, it is important to understand the differences between an arm's length transaction and a non-arm's length transaction. An attorney can explain the plusses and minuses of each type of real estate transaction, so parties can make informed choices.

Source: realtor.com, "What Is an Arm's Length Transaction? Fair and Square Real Estate Sales," Tara Mastroeni, Aug. 30, 2017

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