what is the correct intgerpretation of the difference between an 'arms length' and a 'non-arms length' trans.

Question

I am trying to do a purchase for a customer who loaned the seller 300k as an unrecorded deed on the property- because of this, the lender is assuming this is a non- arms length transaction, as if her and the seller had a previosu relationship, which they did not. Any suggestions on how to verify or prove that?

Answer 1

What the terms represent is that the price paid for a property is not influenced in any way .

An arms length transaction would be between a Seller and a Buyer who do not know each other and the transaction would have no other arrangements other than the normal (Buyer gets mortgage from outside source).

The fact that the Buyer loaned the Seller money in a previous transaction would establish a relationship. The main question here would be "is the market value in this transaction being influenced by this relationship?".

Is the Buyer paying a different amount than another Buyer would be paying for this property, because of the previous $300,000 loan?

If the price paid is different then you could successfully argue that the previous arrangement has influenced the transaction and it would be a "non-arms length transaction".

Answer 2

If there is no deed then it is not a legitimate sale because there is no official title transfer. Even if the transaction happened like this where the seller sold the property for 500k and recorded the deed to say 100k with 400k handed under the table to the seller to avoid the transfer tax it would not be a good sale because the price of 100k on the deed does not reflect market value. Arms length sales refer to the relationship between the parties however there are other factors that will not make the sale good ie: trading personal property in exchange for a lower asking price, cash back at closing, seller financing (most likely reflect a higher price with higher interest rate).