An arm’s length transaction in real estate takes place between an unrelated seller and buyer who each act willingly, independently, and in their own best interests. The property is most likely to be sold at market value, which means that it’s been exposed on the open market for a reasonable length of time to get the highest and best offer, and is sold by the owner with no special financing, sales concessions, or undue pressure.
A non-arm’s length transaction is between a seller and buyer who have a personal connection such as family or friends, and who may not be acting in their own best interest. They may agree on a price that doesn’t reflect the true market value of the property, such as your parents selling their home to you for significantly less than market value because they want to help you more than they want a higher price for the home.
For this reason, it’s important to inform your lender and appraiser that you are buying the home in a non-arm’s length transaction. According to UpCounsel.com, FHA-guaranteed loans can be obtained for a 3.5% down payment in an arm’s length transaction, but the same loan in a non-arm’s length transaction requires 15% down, with a few exceptions. There are also potential tax consequences for real estate that transfers at less than market value.
To avoid potential problems and costs, purchase the property at true market value with the help of your Berkshire Hathaway HomeServices network professional.
Courtesy of bhhs.com