Arms Length Definition

Posted by Joe Manausa on Monday, January 10th, 2011 at 10:18am.

The definition of Arms Length; in a real estate transaction is when both homebuyer and seller are attempting to get the best deal.

If you want to know the definition of "Arms Length" in a real estate transaction, you have come to the right place. This is one of the hottest questions being asked in the housing market right now and we've dedicated a 3 minute video to answering the question on our Real Estate FAQ Page. The full answer is in the video, but a readers digest version of the answer to "what is the definition of arms length" is

The parties to a transaction are independent and on an equal footing… both parties are attempting to get the best deal.

And why is it so important to know what is meant by an arms length transaction? Well, with so many of our local properties being sold in one sort of distress situation or another, lenders are requiring an Arms Length Affidavit to be signed at closing to ensure that nobody is trying to defraud the bank.

Arms Length Defined In Real Estate FAQ Video

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Arms Length Affidavit To Be Signed At Closing

Due to the increase of short sales in Tallahassee, it was inevitable that we would start to see schemes and scams arise to "play the system." Homeowners are hearing about these scams and often ask me what they can do to either keep their home after a short sale, or get some of the "equity" themselves after the sale. Of course, in a short sale, there is no equity.

None of these schemes are very realistic. Banks doing a short sale require an Arms Length Affidavit to be signed at closing, and if you plan to sign an arms-length affidavit with the intent of defrauding a third party, I would strongly recommend you seek legal counsel.

I have been told that there is no "official" document that is used as an arms-length affidavit, but you can expect it to have words similar to this to ensure that nothing fishy is going on:

This sale is an arms-length transaction between Buyer and Seller, and said Buyer, including its principals, directors, and officers, is not an agent, friend, relative, or employee of Seller, but is, in fact, a stranger to the Seller.

As you can see, the bank is going to ensure that the buyer and the seller are not friends, fiances, roommates, family, etc. So my advice to short sellers who are having a hard time letting go is to "let go." If you really like the neighborhood and you have the means to purchase right away (like you would need in the examples above), purchase a different home in the neighborhood. It will be reduced in value just like the home you are currently in, and you won't have to defraud a bank to do it.

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

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