I recently recieved an email from a lender negotiator who insisted that the short sale transaction “Must not be an arms length transaction.”
This inspired me to create this post to help people understand what “Arms Length Transaction” really means in various business contexts.
I’ve listed here Accounting, Investing, Banking and Real Estate Definitions for Arms Length Transaction. Read and Learn.
one entered into by unrelated parties, each acting in their own best interest. It is assumed that in this type of transaction the prices used are the fair market values of the property or services being transferred in the transaction.
transaction that is conducted as though the parties were unrelated, thus avoiding any semblance of conflict of interest. For example, under current law parents may rent real estate to their children and still claim business deductions such as depreciation as long as the parents charge their children what they would charge if someone who is not a relative were to rent the same property.
transaction carried out by unrelated or unaffiliated parties, as by a willing buyer and a willing seller, each acting in his own self-interest. Pricing based on such transactions is the basis of fair market valuations.
a transaction among parties, each of whom acts in his or her own best interest.
Examples: Transactions between the following parties would, in most cases, NOT be considered arm’s length:
- a husband and wife
- a father and son
- a corporation and one of its subsidiaries
Is a bank sale of a home owned by the bank, to private
individuals unknown to the bank, considered an “arm’s length
transaction?”
Reread the post: any time the parties are acting “in their individual best interest” that is to say, without cross purposes - then it is considered to be arms length. So if the bank sells the house to someone they do not know and does so only to get the property off their books and cash out the loss, then yes.
But the arms length issue is more often about the seller/borrower and the buyer - is it a relative, friend or other “accomplice” who is in “cahoots” with the seller/borrower? That is the main issue with foreclosures - of course if the bank allows the sale of properties to their employees this also comes up - which is why most lenders forbid employees from buying REO properties from the bank they work for.
I have read, and re-read your post, and other definitions of what constitutes an “arm’s length transaction.” All concur—except
James R. Hopkins, Director of Appraisal, Cuyahoga County Auditor—
who has advised me in writing “Bank sales are not considered ‘arms
(sic) length transactions’.”
Gerald A. Belfer
Short sale with an arm’s length transaction could be a felony in some cases.
Bob:
Read it again. Arms Length should mean there is no relationship between the parties. OR if there is, they are treated as if there is NOT. In the case of short sales, there can be no relationship between the BUYER and the SELLER according to the bank’s rules. That means you cannot apply the “we are related but will act as if we are not” (as in the case of the parents renting to the children in the first financial definition above). It is no wonder everyone gets confused: the disciplines across the finance, legal and real estate rules each treat the term differently. More evidence of the symptomatic problems of legal, financial and real estate dealings in this country. There SHOULD be ONE definition that is applicable in all forms of commerce.
Here is what applies, just for clarity, once more:
Dictionary of Banking Terms
arm’s length transaction
transaction carried out by unrelated or unaffiliated parties, as by a willing buyer and a willing seller, each acting in his own self-interest. Pricing based on such transactions is the basis of fair market valuations.
Dictionary of Real Estate Terms
arm’s length transaction
a transaction among parties, each of whom acts in his or her own best interest.
Examples: Transactions between the following parties would, in most cases, NOT be considered arm’s length:
* a husband and wife
* a father and son
* a corporation and one of its subsidiaries