Arm’s Length Transactions & UAD Requirements

by Michael on November 29, 2011

For all of my appraisals I always contact the agents involved to verify if the sale actually closed, and whether it was a arm’s length transaction. Apparently not all appraisers must be doing this, because I get a lot of Realtors telling me that this is first that anyone has asked them these questions.

Why the big deal?

The GSE’s (Fannie Mae and Freddie Mac) and HUD (FHA) have gone out of their way to identify whether the comparable sales used within an appraisal are arm’s length transactions with the advent of the new UAD requirements. Appraisers are required to identify whether the sale is one of the following: a short sale, REO, court ordered, estate sale, relocation, non-arm’s length transaction, arm’s length transaction, or a listing.

 

Definitions of an arm’s length transaction:

An arm’s length transaction in real estate is when neither party involved has no relationship between each other, and is acting in their own best interest. These are the types of transactions that lender’s believe constitute and make-up “Market Value” as defined by Fannie Mae and HUD.

From The Dictionary of Real Estate Appraisal 5th Addition

A transaction between unrelated parties who are each acting in his or her own best interest.”

HUD’s definition from ML 2008-38

“An arm’s length transaction is characterized by the following (1) the absence of a relation between the buyer and seller; (2) a selling price and other conditions that would prevail in an open market environment; (3) transaction costs paid by the seller that are considered both reasonable and customary for the market in which the property is located; and (4) the adherence to ethical standards of conduct by all parties involved in the HECM short sale transaction, including the borrowers (or the estate), mortgagees and appraisers.” 

 

What’s the reasoning behind the change?

Implementing the UAD changes will give the GSE’s, and HUD starting in January, the ability to data mine appraisals and create a huge data base. From what I’ve been told by different “real estate mavens”, this is supposed to prevent future problems regarding appraisal values. In my opinion this has the potential to cause all kinds of problems, depending on how they decide to use the data. As you can imagine the data is only as good as it is inputted, and if appraisers aren’t doing their due diligence in reporting accurate data, this could  lead to those appraisers that are doing it right to potentially have to explain themselves as to why their data doesn’t match so and so’s appraisal. And they wonder why appraisers are leaving the business!

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