(Newswire.net — November 6, 2016) — Before going too deep into discussing ways to make your non-arm’s length transactions go smoothly, I think it’s best to clear the air on what exactly non-arm’s length transactions are, so that we may get on the same page – in case you’re seeing this term for the first time.
You probably already know that buying property is tricky, especially if it’s your first time, and might sometimes get complicated and stressful. So it’s easy to think the best way to buy property is from someone you already have a relationship with, personal or professional.
You believe this way, you’d probably get a lower price, the process would be quicker, the other party would be much easier to deal with – based on existing relationship, and you wouldn’t even need to spend some extra money on a real estate agent.
While all these are possible and buying from someone you’re familiar with might indeed be a great idea, I’d advise you to slow down just a bit.
The truth is; buying property from someone you have a relationship with isn’t as simple as one would think, and sometimes it gets more complicated than buying from a total stranger.
Arm’s Length v. Non-Arm’s Length Transactions
Generally, real estate transactions can be broken down into arm’s length transactions and non-arm’s length transactions.
It’s simple: arm’s length transactions are deals between total strangers, while non-arm’s length transactions (as you probably can already imagine) are deals between people who have some relationship, professional or personal – the exact type of deal you’re looking to get.
In an arm’s length transaction, buyers and sellers act independently and out of self-interest because they don’t know each other and there’s no pressure or duress from either party. In this kind of transaction, the seller tries to sell at a price that is as high as possible, while the buyer wants to buy at a price that is as low as possible. This ensures that the final agreed-upon price is as close to market value as possible.
In an article on San Diego Purchase loans on finance no arms length transaction, the author explained that non-arm’s length transactions on the other hand cannot produce this kind of result. Due to discounts or other favors from the seller, the final agreed-upon price would most likely be lower than actual market value.
Things You Need to Do before Deciding to Enter a Non-Arm’s Length Transaction
Now that you already know the difference between an arm’s length and a non-arm’s length transaction, it’s pertinent to note that buying from someone you have a relationship with (non-arm’s length) involves a lot more rules, especially from lenders and government. This might make it seem more complicated, but these rules are in actual fact meant to protect you.
Lenders want to ensure you, the buyer, and the seller are both acting in individual self-interest, not under any duress, are both agreeing on a price that is close to the market value, and finally, aren’t engaging in mortgage fraud – like straw buyers, misrepresentation, etc.
Generally, you want to make sure:
1. The other party is current with their mortgage payments. If they’re not, it could affect your own mortgage approval.
2. You get legal advice. This shouldn’t necessarily be because you don’t trust the other party, but more because you need some help with the legal aspects of purchasing property. This will protect you from a lot of things, and make sure you don’t commit mortgage fraud.
3. You work with a title company that has a For Sale by Owner (FSBO) team that will help you when you’re not using a real estate agent for your non-arm’s length transaction. This will protect you from any debt or liens that might be on the property.
Now you know what a non-arm’s length transaction is and what differentiates it from an arm’s length transaction. You also know things to do before entering such transaction. You can now confidently walk into such transaction armed with this information.
Overall, staying safe and having a seamless transaction is simply ensuring you do your due diligence before buying property from a friend or relative.