An arms- length purchase is when real estate is purchased or sold to an individual you don’t know.
A non arms-length purchase is when the purchaser and seller know each other, perhaps they are family, such as a child purchasing from a parent. Non Arms- length transactions allow schemes to occur where the purchaser doesn’t intend to pay the lender back.
Lenders and mortgage insurers don’t like non arms- length purchases or sales as they feel there is a greater opportunity for fraud between the two parties.
Most common forms of non arms-length transactions are:
- Straw Buyers – when the purchaser is qualified to carry the mortgage loan but the real estate isn’t for themselves – generally the real estate is for someone who wouldn’t qualify because of their credit.
- Property Flipping – is when a group of individuals work together to purchase real estate and then continue to sell the home amongst themselves until they reach the price they want. At this point, they sell the home to an outsider who doesn’t realize that the real estate is overvalued.
- Collusion – is when a real estate lawyer, home builder and appraiser, sometimes there are others in the group as well, create false sales for homes that don’t exist. By the time the lender realizes this it is too late.
Lenders and mortgage insurers avoid these situations by insisting on the following:
If the the real estate transaction is private, so no real estate realtor is used,
- An appraisal will be required on the property,
- The mortgage broker will have to provide a copy of title to confirm the seller is the owner of the real estate, and;
- Separate lawyers from separate law firms will have to be used.
If a realtor is involved:
- An MLS must be supplied for the real estate.
- Depending on the property location an appraisal may be required.
- Generally the lender will ask that the lawyers be from 2 separate offices.