![]() Lenders favor arm’s length transactions because there is less risk of mortgage fraud and similar forms of cheating. Why Do Lenders Favor Arm’s Length Transactions? However, they may face taxation difficulties, as property taxes are based on property’s assessed value, which, in turn, is based on its fair market value. For example, a seller sells a house to their friend for less than what it is worth but with no intention to commit fraud. Apart from taking advantage of their child, the parent has committed mortgage fraud, which comes with stiff penalties, even imprisonment.Ī non-arm’s length transaction may also involve underpaying for a property’s assessed value. ![]() The child may trust their parent’s recommendation and thus overpay. A non-arm’s length transaction opens either party and the lender to risk, as the terms and price of the transaction may be tilted in favor of one party or the other, rather than an objective sale between both parties.įor instance, a parent may ask their child to purchase their $500,000 home for $800,000. The nature of this type of transaction can result in issues, including the manipulation of a property’s true value. On the other hand, a non-arm’s length transaction is one where there is an existing relationship between the buyer and seller. These transactions are more likely to result in a sale that is in alignment with the property’s fair market value. In other words, an arm’s length transaction is a normal real estate transaction.Īrm’s length transactions are usually objective: the buyer would push for a lower price while the seller would insist on the highest selling price possible. As a result, they would objectively act in their own self-interests, reducing the chances of manipulation due to either trust or compulsion. The distinction is important to prevent manipulation from either party and ensure a fair sale.Īn arm’s length transaction is one where the buyer and the seller are independent i.e., they have no relationship or connection with each other. The relationship between the buyer and seller in property-related transactions can be classified into two categories: arm’s length and non-arm’s length.
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