Arms-Length vs Non-Arms-Length: What’s the Difference? – REtipster

Arms-Length Transaction:
Non-Arms-Length Transaction:

0:00 – Intro
0:23 – What is an Arms-Length Transaction?
1:04 – What is a Non-Arms-Length Transaction?
1:34 – An easy way to remember the difference
2:13 – Why does it matter if a transaction is arms-length vs non-arms-length?
4:12 – Common examples of non-arms length transactions
5:40 – How can you verify that a transaction is a normal arms-length sale?

Have you ever heard the term “arms-length transaction” or “non-arms-length transaction” before?

It’s a strange bit of terminology people use in the real estate business, but these terms have a very important meaning that can have big consequences when it comes to the valuation, financing and taxation on any piece of real estate.

So what do these terms mean and what’s the difference between the two?

An arms-length transaction happens when a property is sold and there is no pre-existing relationship between the two parties of a transaction. The buyer and seller are acting independently and they aren’t connected or affiliated by family, marriage, or any other kind of business relationship.

If a buyer and seller are unrelated and have no prior relationship or obligations to each other, it can generally be assumed that the two parties are acting in their own best interests. The buyer is trying to get the lowest price possible and the seller wants to get the highest possible price and whatever price they both agreed upon was an accurate representation of the property’s fair market value. In other words, it was a normal deal.

Now, on the other hand, a non-arms-length transaction is when there IS an existing relationship between the buyer and the seller, or there IS an unusual circumstance that is causing the sale price to be artificially low (kind of like a parent giving property to their child or a brother selling a property to their sister at a lower price). A non-arms-length transaction typically happens when one of the parties has a special interest in the other party’s well-being. It can also happen if the property is sold under duress, causing the sale price to be lower than normal.

One way to remember the difference between an arms-length and a non-arms-length transaction is to imagine two people standing next to each other. If the two people are standing further apart from each other (by their arm’s length or further), by this outward appearance, we could assume that these are two unrelated people doing business under normal circumstances.

However, if you see two people who are standing unusually close together (say if they’re standing shoulder to shoulder or they have their arms around each other), by all outward appearances, one could reasonably assume that the two people probably know each other (or they’re close enough that they might treat each other with more kindness and familiarity than they would to any old stranger on the street).

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