What is a non-arms length transaction?
When it comes to real estate transactions, most are actually arms length transactions. An arms length transaction in real estate is when you have both a seller and buyer who have no relationship to each other and who act independently of each other. Because of this kind of relationship, it’s safe to assume that this transaction will be fair and equitable to all parties involved.
A non-arms length transaction in a real estate transaction would be between family members or relatives in which there could be some sort of conflict of interest. Meaning that a transaction between a father and son could yield a different result. It could result in a lower sales price than what the market demands. Or that one of the parties involved would be giving back a more than normal concession to help purchase the new home, such as seller concessions.
Why can a non-arms length transaction hurt a real estate transaction?
Lenders have different guidelines when it comes to a non-arms length transaction purchase. One great example is that if you have a home that has gone into foreclosure and your father will buy it to help you keep from losing your home, this is not allowed what so ever. It’s not only considered a non-arms length transaction, but there is major interest in the reason for the purchase. The family member is basically bailing out another family member and lenders fret against this.
A non-arms length transaction can fall under ‘identity of interest'. FHA defines this as a sales transaction between parties with family relationships or business relationships. There can be other types of financing restrictions that fall under identity of interest. The main restriction would be the maximum LTV allowed(loan-to-value). Your down payment could be affected if you fall into this situation. I will be going over these types of restrictions in a post tomorrow.
Conclusion : Non-arms length transactions need to be understood and disclosed properly. When regarding a purchase transaction, if the realtor or loan officer doesn’t ask the question upfront, the buyer or seller should be disclosing any type of family relationship to all parties involved. When this kind of information comes up during the process, it could delay or kill the real estate transaction.