Do you know what is a non-arms length transaction?

By
Real Estate Mortgage Broker with Social Media - Infinity Home Mortgage Company, Inc
http://actvra.in/49m4

Do you know what a non-arms length transaction is?

 

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.

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.

 

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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Rainmaker
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Lou Ludwig
CRB, CRS, CIPS, GRI, SRES, TRC, e-PRO
Ludwig & Associates

Jeff

Thanks for sharing your thoughts on a non-arms length transaction.

Good luck and success.

Lou Ludwig

February 24, 2011 03:31 PM
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Jeff Belonger
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Social Media - Infinity Home Mortgage Company, Inc

 

JANET... .  you stated this... "If mom and dad sell house to son and daughter in law, then transaction can only be a 75% LTV per FHA guidelines."

From what I know and looked into, that is not true. If it was the parents primary residence, then the son could buy it with as little as 3.5% down. If it was an investment property, the son must put 15% down. If the parents are going to be co-signors, aka non-occupant co-borrowers after selling the property to their son... from what I know, this can't be done at all. Now, I could be wrong, but where are you coming up with the 75% LTV?  And for which scenario?

You then stated this...  "Then FHA rejected the loan again because parents wanted to go on as non owner co-applicants with daughter in law (ruling from our FHA lenders was that they would only accept non owner co-applicant who was a son or daughter)"

You lost me on the last sentence, when you said...  "only accept a non owner co-applicant who was a son or a daughter."   Are you saying that they will accept a non-owner co-borrower if they were a son or daughter, but not if they were a mom or dad?  because the guideline is that you can have a family member, doesn't matter if mom, dad, son, sister... to be on the loan if the family is buying a property that is a primary house... but if it's a house that the family currently owns and is selling to their son, sister, or if it's the son selling it to his parents... this can't be allowed. Does this make sense now?  But regarding the 25% down part.. I am not sure where that came from.  thanks

 

LESLIE... . hope I was able to help. But your part about Jeremy in comment # 1.. all he is saying is that he sees people do this... but he didn't say if any of these closed. I highly doubt it. the only two ways that i can see is hist statement working is A. if the underwriting doesn't catch the same last names on the agreement of sale and the title report.. or.. B. if it was a family member or relative with a last different name and on paper, you couldn't tell with the paper trail.

LOU... . my pleasure and thanks.. you to.

 

February 24, 2011 06:51 PM
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Jeff Dowler CRS
Carlsbad CA Homes for Sale (760) 840-1360
Solutions Real Estate

Jeff

Disclosure is the key, isn't it?! Aren't there scenarios with lenders when you CANNOT do an non-arms length transaction?

Jeff

February 24, 2011 11:57 PM
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Bill Burchard
Broker, Realtor - Murrieta Homes For Sale, Califor
3B Realty: BRE# 01864774

Good morning, Jeff. Nice, easy-to-understand explanation of arms length transactions. (Or should I say, non-arms length transactions.)

February 25, 2011 01:25 PM
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Roy Paeth
FHA USDA and Homepath Mortgage Loans Illinois NMLS
Command Capital Mortgage Services

Good information Jeff. I have come across a couple of these deals lately and the family member just cannot understand why dad cannot buy the son's home that is going into forclosure.

March 03, 2011 12:37 AM
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I just want to educate people about mortgages and the process. In regards to lending, I am very creative, intuitive, honest, and one who communicates information, may it be good or bad. I am a loan officer that looks out for your best interest.