In all candor, however, I can’t say this question would be so cut-and-dried to me now. Therefore, based on this analysis, at one time I would have concluded this was NOT an arm’s-length transaction. Further, the tenant as the contract-grantee might have had some “sentimental” reasons to purchase the property (although I can’t imagine about how anybody could get sentimental about a duplex property), thus may have other-than-market motivations to purchase. Let’s assume, for the purposes of this discussion, that some analysis on your part reveals that this property was never offered for sale via the local MLS. With those data only, how do you conclude if this is an arm’s-length transaction? Your client gives you a copy of the tenant’s current lease, as well as a copy of the signed and executory purchase and sales agreement. Now, consider a situation in which a tenant in a duplex is the contract grantee. Yet, both of them call for the appraiser to use only arm’s-length transactions as comparable sales (which is what the definition of market value assumes). Surprisingly, USPAP does not define the term arm’s-length transaction. However, was that correct? Let’s go to USPAP to see what it says. This is how this concept was taught to me when I took my original appraisal classes, oh so long ago. In other words, it was a typical market transaction. I thought such a transaction was one where the buyer and seller were traditionally motivated there was no coercion, no bias no relationship between the parties. Are we truly aware of its definition and its application? How often do we appraisers get into the mode where we think we know it all? Occasionally, do we need to step back and look at the way we do things, just to make sure we are not missing something? Is what we know to be true and correct really true and correct? I raise this issue relative to the concept of what an arm’s-length transaction is. Yet, both of them call for the appraiser to use only arm’s-length transactions as comparable sales… All rights reserved.USPAP does not define the term arm’s-length transaction. The website owner is not responsible for damages allegedly arising from use of this website's AI.Ĭopyright © 2023 Janover Inc. Users should not rely upon AI-generated content for definitive advice and instead should confirm facts or consult professionals regarding any personal, legal, financial or other matters. This website utilizes artificial intelligence technologies to auto-generate responses, which have limitations in accuracy and appropriateness. We are not affiliated with the Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), Freddie Mac or Fannie Mae. Fannie Mae® is a registered trademark of Fannie Mae. We use cookies to provide you with a great experience and to help our website run effectively.įreddie Mac® and Optigo® are registered trademarks of Freddie Mac. By using this website, you agree to our use of cookies, our Terms of Use and our Privacy Policy. We are a technology company that uses software and experience to bring lenders and borrowers together. We have no affiliation with any government agency and are not a lender. This website is owned by a company that offers business advice, information and other services related to multifamily, commercial real estate, and business financing. In addition, attempting to engage in a 1031 exchange with a related party is often more trouble than it’s worth, as the IRS has instituted additional rules involving related-party transactions in order to reduce the potential for tax avoidance. This is essential to understand if you are considering buying commercial real estate at a discount from a relative or business partner. However, they will still generally need to pay property taxes on the full market value of the property. In many cases, a non-arm’s length transaction will involve one party purchasing a property from another party, sometimes at a significant discount. Non-arm's length transactions can also have significant tax implications. In part, this is due to the fact that lenders may be wary of working with borrowers who are purchasing a commercial property from a relative or business partner. This has important consequences when it comes to buying and selling commercial real estate. In an arm’s length transaction, the buyer of a product does not have a preexisting familial or business relationship with the seller.
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