Why Identifying Arm’s Length Transactions Matters
To many the term “arm’s length transaction” might sound like jargon, but understanding this concept is critical—not just for appraisers, but for anyone buying, selling, or investing in property. To illustrate why, let me share a story from a recent appraisal.
Recently, I was appraising a home for a private sale and received a copy of the purchase contract. Based on my familiarity with the neighborhood, I realized the sale price seemed unusually low. At first glance, there was no clear sign of a relationship between the buyer and seller — different last names, no language in the contract suggesting a family or business connection. I thought, “Well, either there’s a relationship here that I can’t see, or maybe the home is in rough shape.”
When I arrived for the walk through, I quickly ruled out the second possibility. The exterior was in excellent shape: new siding, roof, and windows, with above-average landscaping. Meanwhile, the interior was extremely well-maintained, with updated flooring, fresh paint, and modern fixtures. The kitchen and bathrooms did lack modern updates (original cabinets, no dishwasher), the home’s overall condition was far better than its low sale price suggested. Luckily, the seller was home during my visit. so I quickly learned the reason for the low price: she was selling to her granddaughter.
Why Does the Appraiser Care?
At this point, you might wonder, “Who cares? Of course, a grandmother would want to help her granddaughter. Why does the appraiser need to know?” Because misclassifying this non-arm’s length transaction as a typical market sale could distort property values in the neighborhood.
The Domino Effect of Misclassified Transactions
Let’s imagine that this sale, incorrectly classified as an arm’s length transaction, becomes a comparable sale for the next property appraisal in the neighborhood:
The next month, another three-bedroom, two-bathroom ranch — similar in size and condition — goes up for sale across the street. The agents and appraiser working on that property might see the discounted sale as a perfect comparable, not realizing it wasn’t arm’s length. What about the homeowner? Well, this seller never really knew his neighbor, so he also didn't realize the relationship.
Because of this, the new property is listed and sells for less than its true market value, influenced by the lower comparable. Now, there are two artificially low sales in the area.
When a third home comes up for sale, those two discounted transactions become benchmarks, further driving down perceived property values.
Over time, this creates a downward spiral that affects the entire neighborhood, all because one non-arm’s length transaction wasn’t properly identified and reported.
So, What Defines an Arm’s Length Transaction?
The Dictionary of Real Estate defines an arm’s length transaction as:
"A transaction between unrelated parties who are each acting in his or her own best interests."
In other words, both the buyer and seller act independently, with no relationship or special circumstances influencing the sale. The price reflects the true market value of the property, determined by fair negotiation and market conditions.
Examples of Non-Arm’s Length Transactions
In the story above, the grandmother-granddaughter relationship was obvious once I learned about it. But not all non-arm’s length transactions are as easy to identify. Here are some common examples and addition to obvious familial relationships;
Close Personal Relationships: Sales involving close friends or romantic partners.
Business Ties: Sales between business partners, or companies under common ownership.
Tenant-Landlord Sales: Occasionally, landlords sell to tenants under terms that aren’t market-driven.
How Appraisers Identify Non-Arm’s Length Transactions
Appraisers take steps to uncover non-arm’s length transactions by:
Reviewing public records, MLS data, and contracts for indications of relationships.
Comparing sale prices to similar properties sold under normal conditions.
Asking questions during the property inspection, when possible, to understand the sale circumstances.
Calling any agents involved in a sale and simply asking.
If a sale is non-arm’s length, the appraiser excludes it as a direct comparable or makes adjustments to account for its unique circumstances.
Protecting Market Integrity
Understanding and identifying arm’s length transactions is essential for maintaining accurate property values. Misclassifying non-arm’s length transactions can distort market data, leading to undervaluation or overvaluation of properties, which ultimately affects homeowners, buyers, lenders, and the entire community.
If you’re buying or selling a property, be upfront about any relationships or special circumstances involved. For appraisers, this transparency helps ensure fair and accurate valuations.
When buying or selling a home, you’ll likely hear about both an appraisal and a home inspection. While both are critical steps in the buying process, they serve very different purposes. What is an Appraisal? An appraisal evaluates a property’s fair market value. This process is typically required to ensure the property is worth the amount being financed and is conducted by a licensed or certified real estate appraiser who is trained to analyze market data and assess the value objectively. The appraiser visits the home to observe key attributes such as condition, layout, size, functionality and then prepares a written report explaining and supporting their opinion of the property's market value. This report is primarily for the lender, but also offers valuable insights for buyers and sellers.
What Does An Appraisal Report Cover?
The property’s key attributes such as size, condition, and features
Comparable sales (recently sold similar properties nearby)
Location and market trends
What is a Home Inspection? A home inspection evaluates the condition of a property. This is typically done during the due diligence phase of a home purchase to identify any potential issues with the home’s structure or systems. This is generally required by the buyer and is conducted by a licensed home inspector who is trained to assess the physical condition of the property. The inspector then provides a detailed report highlighting any issues or repairs needed. This information helps buyers decide whether to move forward with the purchase, negotiate repairs, or even walk away from the deal.
What Does It Cover?
Structural components (foundation, walls, roof)
Major systems (plumbing, electrical, HVAC)
Potential safety hazards, such as mold or faulty wiring
Do You Need Both? Yes — both serve unique and essential purposes. While the appraisal ensures the home’s value aligns with the loan amount, the inspection helps you understand the home’s condition and any potential repair costs.
For example:
An appraisal might confirm the home is worth the $300,000 contract price.
A home inspection might reveal the roof needs to be replaced soon, which could cost $10,000+/-.
This dual approach protects both the buyer and the lender. The Bottom Line An appraisal and a home inspection are not interchangeable—they are complementary. The appraisal focuses on value; the inspection focuses on condition. Together, they provide a comprehensive picture of the property, helping buyers, sellers, and lenders make informed decisions.
If you have questions about the appraisal process or need help determining your property’s value, reach out today.
When it comes to real estate appraisal, one of the most essential aspects of determining a property’s value is the selection of comparable sales, or “comps.” But what exactly makes a property a comparable sale? Here, we’ll break down the basic guidelines for choosing comps, giving you insight into how appraisers arrive at a fair and accurate property value.
1. Location, Location, Location In real estate, location is critical. Ideally, a comparable sale should be located within the same neighborhood as the subject property—often within a one-mile radius in urban areas. But if there aren’t any recent sales in the immediate area, appraisers may broaden their search to include “competing” neighborhoods. This is where a geographically knowledgeable, local appraiser can really make a difference, using insights into subtle neighborhood nuances that can impact property values.
2. Similar Design Design is another key factor in selecting comps. Homes with similar architectural styles tend to share market appeal and construction costs. For example, ranch-style homes often cost more to build than multi-story homes with the same square footage due to larger foundations and roofs. So, if the subject property is a ranch, it’s best to select other ranch-style homes as comps. The same goes for two-story homes and other distinct designs.
3. Age, Condition, and Effective Age Age and condition of a property often go hand-in-hand in comp selection, but it’s important to distinguish between a home’s actual age (when it was built) and its effective age (how “old” it feels based on condition and updates).
Appraisers usually look for comparables within a similar actual age range—10-20 years for older properties and 5-10 years for newer builds. However, condition can impact a home’s effective age. An older home that’s been extensively updated (think new roof, electrical, plumbing, and finishes) may have a much lower effective age than its actual age, making it comparable to newer homes. Conversely, a newer home that’s had minimal maintenance or wear-and-tear may have a higher effective age, making it more comparable to older properties in similar condition. Effective age provides a more accurate reflection of a property’s utility, appeal, and marketability in the eyes of potential buyers.
4. Gross Living Area (GLA) Gross Living Area (GLA) refers to the total above-grade, finished living space, an essential factor in comp selection. Appraisers seek comps with a GLA within 20-25% of the subject property to maintain consistency in size. Accurate GLA data is critical; it’s important for MLS listings to specify above-grade versus below-grade space and room counts. Any discrepancies in GLA can lead to inaccurate valuations, affecting the appraisal outcome.
5. Similar Utility The utility of a property, meaning the number of bedrooms, bathrooms, garage spaces, basement finishes, and other functional features, should align between the subject and comparable properties. For instance, a comp with fewer bedrooms or no garage could skew valuation when compared to a fully equipped property. Appraisers look for properties with similar utility to provide an equitable comparison.
The Bottom Line Choosing the right comps requires a combination of knowledge, analysis, and market expertise. By following these guidelines, appraisers strive to deliver the most accurate valuation possible, balancing factors like location, design, age, condition, and utility. This process helps ensure that the selected comps genuinely reflect the subject property’s value in the current market.
In real estate, accurate comps can mean the difference between a successful transaction and a missed opportunity. So, next time you review an appraisal, you’ll know what to look for in those comparables!