I knew a guy who was once given an expensive sports car. I was shocked when he told me someone came up to him and handed him keys to a Porsche. Nice stranger, right? A couple of news outlets even covered the story about this stranger’s generosity. Yet here’s the deal. The sports car owner was on the cusp of divorce and his soon-to-be ex would’ve potentially gotten the car anyway, so this was really more about dumping an asset instead of random kindness.
Now with that story fresh in mind, let’s consider the concept of an arm’s-length transaction. There wasn’t a buyer in this situation of course, but still there is something important here to note with the concept of “giving away” a property – or in other words selling at a price that really doesn’t reflect the market.
What is an “arm’s-length” sale? “It is a transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm’s-length transaction is to ensure that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party” (Ivestopedia). The classic example of a non-arm’s-length transaction is a parent selling to a child. Instead of the seller acting in his best interest with the highest price, the parent offers the child a discount, which means it is a non-arm’s-length transaction.
Why does it matter whether it is an arm’s-length sale or not?
Chris Opfer of Mason-McDuffie Mortgage explains. Arm’s-length transactions are sometimes confusing to understand, and in many cases can cause big problems for loan officers. The whole idea is to make sure that none of the parties involved knew each other prior to the purchase contract being ratified. The thinking is that each party will fight for the best deal possible for themselves. If any of the parties did know each other, then that would be considered a non-arm’s length transaction and can cause issues when it comes to securing a loan. Loan fraud is always on the top of our minds, and it’s important to protect the buyer from being taken advantage of and to keep the property values …read more
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