As a real estate appraiser, it’s crucial to figure out if a transaction is an arms-length sale, a non-arms-length sale, or another type of sale. Properties sold due to job relocation, estate settlement, foreclosure, or divorce might go for less than market value. So, whether you’re looking at the current terms of sale or reviewing past sales of the subject property or comparables, you’ve got to factor in the type of sale.
Before we jump into the seven legit sales types, let’s pause for a moment to go over key definitions and tackle common questions like, “What does arm’s length mean in real estate?” and “What’s the difference between an arm’s length vs. non-arms length sale?
What is market value?
In a nutshell, market value is the likely price a property could fetch in a competitive and open market. To meet this definition, there should be an arm’s length transaction where each party acts in their best interests. It also means the buyer and seller aren’t making decisions in a rush or under pressure, and the property has been on the market for a reasonable amount of time.
What does arm’s length mean in real estate?
A non-arm’s length sale in real estate is a deal between a seller and buyer who are connected through marriage, family, work, etc. Due to their relationship, each party might not be making decisions in their best interests. As a result, the final price may not truly represent the market value of the property.
The 7 sale types in real estate
The sale type can shed light on whether the transaction is (or was) an arm’s length deal, if a comparable sale is suitable, or if an adjustment is needed for comparable terms of sale. Understanding the sale type helps you reconcile a current opinion of market value that may differ from a recent transaction for the subject property.
For appraisals that need to comply with the Uniform Appraisal Dataset (UAD), you gotta specify the type of sale for the transaction. Feel free to mention any other pertinent info about the sale type in the appraisal report, like whether more than one sale type is in play.
Here are the seven valid sale types, explained in detail below:
- REO sale
- Short sale
- Court ordered sale
- Estate sale
- Relocation sale
- 6 Non-arm’s length sale
- 7. Arm’s length sale
REO sale
A Real Estate Owned (REO) transaction is when a home, foreclosed upon, is sold by the lender who’s now the owner/seller of the property. The deal happens between the lender and the buyer. Normally, these homes are sold “as is” and are often priced to sell quickly. Occasionally, the home might be in rough shape or need significant repairs.
Short sale
Unlike an REO or foreclosure sale, in a short sale, the homeowner still owns the property but sells it for less than what’s owed. Typically, the homeowner is facing financial hardship, making it tough to meet mortgage payments. Both the homeowner and the lender must agree to accept a shortage and approve the sale. These sales sometimes take a while to negotiate with the lender and get approval, and there could be additional costs or outstanding liens to settle.
Court ordered sale
A court-ordered sale can stem from disagreements among owners, a divorce, the death of an owner, or a foreclosure due to mortgage non-payment by the borrower. After the redemption period (if applicable) lapses, the court steps in and issues an order to sell or dispose of the property. This is when the owner loses control over selling the property. An official (like a trustee or sheriff) appointed by the court typically handles the sale, usually to fulfill a judgment or carry out another court order.
Estate sale
The estate is the real estate owned by someone who passed away. It goes through probate to allow for the sale of the real estate, and the proceeds are then divided among the heirs of the deceased. The sale is managed by a representative (executor), as specified in a will and/or appointed by the probate court.
Relocation sale
Bigger companies bring in a relocation company to handle the sale of a property when an employee is relocating or moving to another state. The relocation company might purchase the property at a prearranged price with the corporate employee, and then sell it to the market in its existing condition, typically “as is.” They often aim to sell the property swiftly, so it might not stay on the market as long as other similar properties.
Non-arm’s length sale
As mentioned earlier, a non-arm’s length sale is a real estate deal where the seller and buyer are connected through marriage, family, work, and so on. Consequently, the final price in this kind of transaction might not truly represent the property’s market value. Lenders and appraisers see this type of transaction as riskier because the involved parties may not be acting independently of each other.
Arm’s length sale
As we discussed earlier, an arm’s length sale is described as “A transaction between unrelated parties who are each acting in his or her own best interest.” For this kind of deal, the property is on the market for a reasonable amount of time, and the payment is made in cash or its equivalent. The property sold isn’t influenced by special or creative financing or sales concessions. This type of sale is the least risky for the lender and is likely to be closest to the market value.Keep in mind that market value hinges on buyers and sellers being usually motivated, well-informed, and acting in their best interest.
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