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… Non-arm’s length transactions can still close smoothly and on-time with cooperation and proper disclosure by all involved.USPAP does not define the term arm’s-length transaction. Since the affidavit regarding an arm’s length transaction is a legal document requiring the signatures of both parties, it is critical to answer the question truthfully! The transaction will then be handled as such to comply with all applicable laws. Reporting of capital gains may vary as well. For example, taxes might be calculated on appraised value rather than sales price. However, the sale could be treated slightly differently. Sales that involve related parties are certainly legal and take place all the time. Additionally, the seller will be reporting less profit on the sale, which again could result in lower capital gains taxes. In this case, the municipality will collect less in transfer tax dollars. For example, in a real estate transaction among family members, it’s possible that one relative might sell a home to another for much less than market value. When a transaction is not arm’s length, the price could be more or less than market value. When a transaction is arm’s length, we can assume that the agreed upon sale price is a reflection of current market value. Other things then rely on that value, such as municipal transfer taxes and federal/state income taxes. These two opposing forces create a balance that determines market value. Sellers obviously want to sell for as high a price as possible, and buyers want to negotiate the lowest price possible. In real estate, market values are determined by buyer and seller actions/motivations. Why Arm’s Length Transactions in Real Estate is Important For instance, two parents who are merely part of the same PTO group would be arm’s length, but two people who are investors in the same company would not be. However, two people who simply know each other can still be arm’s length, so long as neither can benefit financially from the actions of the other. Thus, one family member selling a home to another would NOT be arm’s length. Essentially, an arm’s length transaction involves two independent parties looking out only for their own interests. One party does not have an interest in or benefit from the actions of the other. When something is arm’s length, it means that the parties involved are not related in any way. Here’s a quick overview of arm’s length transactions in real estate for Massachusetts home buyers and sellers. Before answering, it is important to understand what it is and why it’s even asked in the first place. Your answer is legally binding and could have certain implications. When buying or selling a home in Massachusetts, you will be asked whether the transaction is arm’s length.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |