Category Archives: Buyer Information

What is an arm’s length transaction in real estate?

What does arm’s length mean in real estate?

An arm’s length sale in real estate is a transaction between an unrelated seller and buyer. In this type of transaction, each party acts independently and in their own best interests. The property is exposed on the market for a reasonable length of time and is unaffected by special financing or sales concessions. Therefore, the sale price most likely reflects the market value.

What does non-arm’s length mean in real estate?

non-arm’s length sale in real estate is a transaction between a seller and buyer who have a connection by marriage, family, work, etc. Because of their relationship, each party may not be acting in their own best interests. Therefore, the final price may not reflect the market value of the property.

The 7 sale types in real estate

The type of sale can provide some clarity into whether the transaction was (or currently is) an arm’s length transaction, whether a comparable sale should be used, or whether an adjustment is warranted for the terms of sale for a comparable. By knowing the type of sale, you are better able to reconcile a current opinion of market value that falls above or below a current or recent transaction for the subject property.

For appraisals required to be Uniform Appraisal Dataset (UAD) compliant, you must indicate the type of sale for the transaction. You may report any other relevant information regarding the sale type in the appraisal report, including whether more than one sale type applies.

Here are the seven valid sale types, explained in detail below:

  • REO sale
  • Short sale
  • Court ordered sale
  • Estate sale
  • Relocation sale
  • Non-arm’s length sale
  • Arm’s length sale

REO sale

A Real Estate Owned (REO) transaction is a sale of a home that has been foreclosed and the lender is the owner/seller of the home. The transaction is between the lender and the buyer. Usually these homes are sold “as is” and typically are priced to sell relatively quickly. Sometimes the home is in poor condition or may require extensive repairs.

Short sale

Unlike an REO or foreclosure sale, the homeowner still holds title to the property, but sells short for less than what is owed on the property. Usually, the homeowner is suffering some type of financial hardship which is preventing them from meeting the mortgage payments. The homeowner and the lender must agree to accept a shortage and must approve the sale. Sometimes these sales require extended time to negotiate with the lender and obtain approval for the sale, and there may be some additional costs or outstanding liens that need to be paid off.

Court ordered sale

A court ordered sale may be the result of a dispute among the owners, divorce, death of one of the owners, or a foreclosure where the borrower defaulted on paying the mortgage. Once the redemption period expires (if applicable), the court will issue an order directing the sale or other disposition of the property. This is the point at which the owner has lost control over the ability to sell the property. The property is sold by an official (trustee or sheriff) appointed by the court, usually to satisfy a judgment or implement another order of the court.

Estate sale

The estate is the real estate owned by a decedent at the time of his or her death. The estate is probated so that the real estate can be sold and the proceeds are distributed to the decedent’s heirs. The sale is handled by a representative (executor) named in a will and/or appointed by the probate court.

Relocation sale

Larger companies hire a relocation company to sell the property of an employee that is being transferred or moved to another state. The relocation company may buy the property at an agreed upon price with the corporate employee, then in turn sell the property to the market in an “as is” condition. Often, the property is attempted to be sold quickly, so the property may not be exposed as long as competitive properties in the market.

Non-arm’s length sale

As stated above, a non-arm’s length sale is a real estate transaction in which the seller and buyer have a connection by marriage, family, work, etc. As a result, this type of transaction’s final price may not reflect the market value of the property. Lenders and appraisers view this type of transaction as riskier because the parties involved are not necessarily acting independently of each other.

Arm’s length sale

As explained above, an arm’s length sale is defined as, “A transaction between unrelated parties who are each acting in his or her own best interest.”1 For this type of transaction, the property is exposed on the market for a reasonable length of time and payment is in cash or its equivalent. The property sold is unaffected by special or creative financing or sales concessions. This type of sale is the least risky to the lender and is most likely to be closest to market value.

What is market value?

In general, market value is defined as the most probable price a property should bring in a competitive and open market. This definition requires an arm’s length transaction with each of the parties acting in their own best interests. Additionally, it requires that the buyer and seller are not acting out of undue haste or duress and that the real property has been exposed on the market for a reasonable period of time.

Reference: The Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th. Ed.

How to Navigate High Mortgage Interest Rates

Mortgage interest rates are hovering at the highest levels in over 23 years, causing mortgage demand to sink to a 27-year low. Waiting for home prices to come down has had little success for homebuyers due to an unprecedented imbalance in housing supply. What can you and other homebuyers do to increase your buying power?

One advantage of higher interest rates is that they can make you money in other investments until you’re ready to buy your home. Start with a debt consolidation loan to pay off high-interest credit cards. Do some research to learn where it’s best to park some cash in savings, the term of the investment(s), and penalties for early withdrawals, if applicable.

High-yield savings accounts. Most savings accounts have variable annual percentage yields (APYs), which means the return is linked to Federal Reserve overnight funds rate changes. Currently, you can get yields between 4.00% and 5.00% APYs while a traditional savings account is 0.50% or less.

Certificate of deposit (CD) accounts. The average 12-month CD is about 1.49%, still much higher than a typical savings account. But many online financial institutions are paying 4.5% to 5% .

Corporate bonds. To raise capital, some corporations issue debt securities which means you’re loaning money to the company in return for regular income payments and the return of your initial capital when the bond reaches maturity. The benefits are lower risk for investment-grade corporate bonds, lower volatility, and greater diversification that’s not tied to the stock market.

Homebuyers’ Five Biggest Complaints

Homebuyers have one simple expectation – that when they go out with their agent to shop for a home that the seller is ready for them to buy. 

That means no sticking drawers in the kitchen. No leaning fences. No rust-stained plumbing fixtures. We could go on, but maybe we need to make it clear.  If you have even one of following “turn-offs,” your home won’t sell. 

Overpricing your home

Overpricing your home is like trying to crash the country club without a membership. The ones who belong know that you don’t and you’re going to get some negative feedback. The worst feedback, of course, is silence. That could include no showings and no offers. 

The problem with overpricing your home is that the buyers who are qualified to buy your home won’t see it because they’re shopping in a lower price range. The buyers who do will quickly realize that there are other homes in the same price range that offer more value.

Smells

Smells can come from a number of sources – pets, lack of cleanliness, stale air, water damage, cooking, and much more.  You may not even notice it, but there’s not a buyer in the world that will buy a home that smells unless they’re investors looking for a bargain. Even so, they’ll get a forensic inspection to find out the source of the smells. If they find anything like undisclosed water damage, or pet urine under the “new” carpet, then they will either severely discount their offer or walk away. 

Clutter

If your tables are full to the edges with photos, figurines, mail, and drinking glasses, buyers’ attention is going to be more focused on running the gauntlet of your living room without breaking any Hummel figurines than in considering your home for purchase. 

Clutter and too much furniture confuse the eye, making it really difficult for buyers to see the proportions of rooms and to try to imagine themselves living there. If they can’t see what they need to know, they move on to the next home.  

Deferred maintenance

Deferred maintenance is a polite euphemism for letting your home fall apart. Just like people age due to the effects of the sun, wind and gravity, so do structures like your home.  Things wear out, break and appear rickety. Especially with an older home, it’s your job as the homeowner to keep your home in good repair.  

Your buyers really want a home that’s been well-maintained. They don’t want to wonder what needs to fix or how much repairs will cost. 

Dated décor

The reason people are looking at your home instead of buying brand new is because of cost and location.  They want your neighborhood, but that doesn’t mean they want a time capsule of a home.  Just like they want a home in good repair, they want a home with updates that complement the home’s era and brings it into the modern era. 

Harvest gold and avocado green from the seventies; soft blues and mauves from the eighties, jewel tones from the nineties, and onyx and pewter from the oughts to be all colorways that can date your home.  Textures like popcorn ceilings, shag or berber carpet, and flocked wallpaper are also undesirable.  

When you’re behind the times, buyers don’t want to join you.  And your Berkshire Hathaway HomeServices network professional can’t get you the price and terms you want. He or she can work miracles, but only if you follow their advice and get your home up to speed – the speed of today’s market. 

Choosing the Home with the Right Square Footage

Homebuyers are feeling the sticker shock of higher prices, but it’s not just inflation. They want bigger homes. In 1949, the average size of a new single-family home was 909 square feet, while homes grew to 2,480 square feet by 2021. Homebuyers want more than they had before, including more space, energy-efficient appliances, and smart home technologies, all of which is making homes more expensive.

But how much living space does a family really need? According to the National Association of REALTORS®, a typical home purchased recently is 1,800 square feet with three bedrooms and two bathrooms and was built in 1986, but that may not be enough space for some homebuyers. While it’s totally subjective, a good rule of thumb is that each person should have 200 and 400 square feet of living space. So, a family of four would be comfortable with a home of about 2,400 square feet.

To help you choose the right-sized home, consider your family’s needs. Small children can comfortably share a bedroom, but teenagers need more privacy. Aging parents are safer in single-level homes or a downstairs owner’s suite, preferably with a separate entrance and living area. You may need more space if you’re working from home and need a home office, a playroom for kids, a bigger kitchen, or an owner’s suite with his and her baths.

Whatever you choose, make sure the layout and square footage also aligns with how much you want to maintain and pay for utilities. 

Will Your HOA Allow Your Home Business?

Homeowners’ associations (HOAs) are formed by the owners of units within a community to manage, maintain and improve quality of life for residents and increase their property values. And there are four things all HOAs hate—strangers, traffic, safety issues, and anything that might cause declines in property values, such as home-based businesses.

Out of 32.5 million small businesses, about 19 million are home-based or began at home, according to The U.S. Small Business Association. Following the pandemic, many workers found that they want to be their own bosses, but this is a growing issue for HOAs that prohibit homeowners from using their properties for commercial purposes.

While it’s fine to have a home office business such as accounting or search engine optimization, your HOA won’t allow you to use your home for obvious commercial use such as manufacturing, storing large equipment, or making or receiving frequent deliveries. HOAs don’t want people coming and going to your house, or for trucks and cars to crowd the streets and parking spaces. It makes your neighbors feel put upon, inconvenienced, unsafe, and less confident in the security of their community.

As an existing homeowner, you should have a copy of your HOA’s governing documents and by-laws, covenants, conditions, and restrictions—so you can see where your HOA stands on the issue. If you’re considering choosing a home in an HOA-managed community, make certain you review the association documents as a condition of your inspection.

Choose the Right Size for Your Next Home

Homebuyers are feeling the sticker shock of higher prices, but it’s not just inflation. They want bigger homes. In 1949, the average size of a new single-family home was 909 square feet, while homes grew to 2,480 square feet by 2021. Homebuyers want more than they had before, including more space, energy-efficient appliances, and smart home technologies, all of which is making homes more expensive.

But how much living space does a family really need? According to the National Association of REALTORS®, a typical home purchased recently is 1,800 square feet with three bedrooms and two bathrooms and was built in 1986, but that may not be enough space for some homebuyers. While it’s totally subjective, a good rule of thumb is that each person should have 200 and 400 square feet of living space. So, a family of four would be comfortable with a home of about 2,400 square feet.

To help you choose the right-sized home, consider your family’s needs. Small children can comfortably share a bedroom, but teenagers need more privacy. Aging parents are safer in single-level homes or a downstairs owner’s suite, preferably with a separate entrance and living area. You may need more space if you’re working from home and need a home office, a playroom for kids, a bigger kitchen, or an owner’s suite with his and her baths.

Whatever you choose, make sure the layout and square footage also aligns with how much you want to maintain and pay for utilities.

How Property Comparables Are Chosen

Whether you’re selling your home or buying a home, your Berkshire Hathaway HomeServices network professional will provide you with a comparative market analysis (CMA), a computer-generated report that shows you what homes similar to yours are selling for in your area, or how the home you’re interested in buying compares to other homes on the market.

CMAs are only available to members of the local multiple listing service, which include licensed real estate agents, brokers, appraisers, real estate attorneys, and local property tax authorities. It takes skill and experience to create a report that can help you choose a listing price range for your home or to help you make an offer on one of the homes you’re seeing. 

A CMA can be as narrow as a city block or as broad as a zip code. It can include data on homes for the latest week, month, or six-month period. It can show you homes for sale and those that have recently sold. CMAs can be made specific with search parameters that show only one-story homes, condos, or homes with swimming pools.

Occasionally, you’ll find that the CMA doesn’t have a nearby comparable. In that case, the search parameters must be widened, which may not give as true a picture of value, for the neighborhood.

You may be pleased or dismayed by what the CMA shows, but you should know that it’s an accurate depiction in real time of current market conditions—until a new comparable changes the results.

Sellers: Don’t Be Surprised by Repairs

Repairs or replacements that the homebuyer requires to be completed before closing on the sale of your home can blindside you if you’re not prepared. While any unforeseen expenses are an unwelcome surprise, you’ll still have to fix the problems or risk letting your buyer out of the contract and having to disclose the problems to future homebuyers.

Homebuyers have the right to have the home they’re buying professionally inspected. The purpose of the inspection is to inform the buyer as to the condition, age and likely lifespan of major systems and appliances in the home. As a contingency in the contract, the buyer has the choice to proceed with the contract or ask the seller for repairs or replacements. This is fair because many issues with a home can’t be seen with the naked eye. An inspection gives a rough idea of future expenditures; if there are more problems than the buyer is willing to allow, the transaction will be in jeopardy. The buyer can’t help but wonder what other problems may come to light about the home.

Obviously, the less the buyer finds wrong, the smoother the transaction will be. Before you put your home on the market, hire a licensed home inspector to alert you to unknown problems and repair or replace them so the buyer has no misgivings. You’ll also be able to ask a higher price for your home when it’s in excellent condition.

Get Ready to Buy a Home in 2023

Inflation, home prices and interest rates were higher in 2022 than they’ve been in years, but if you’re planning to become a homeowner in 2023, you’ve got time to improve your buying power.

It’s strongly recommended to talk to a mortgage lender, even if you aren’t ready to buy until later in the year. They can “review all aspects of your financial picture” and help you find sources for a down payment, help you raise your credit score to improve your future borrowing rate and help you find ways to reduce your existing debt without triggering costly inquiries into your credit history. Most important, they can help you understand the differences between conventional (Fannie Mae, Freddie Mac) and government-guaranteed (FHA, VA, USDA) loan programs and help you choose the right loan so you can work toward qualifying for the most favorable terms.

Your goal for the near term is to save as much as possible toward a down payment. With VA or USDA loans, no down payment is required, but for other loans, you’ll need at least 3.5% of the purchase price of the home you plan to buy as a down payment. At the same time, you want to pay down debts, beginning with the least expensive credit card balances to improve your credit scores. Don’t close any accounts or incur new debt. Keep your revolving loan balances to 30% or below your credit limits. The higher your credit score, the more loan options are available to you.

It’s been the year for contradictions in the housing market

Housing sales have slowed down, home builders are slowing down production and mortgage interest rates are more than double what they were a year ago. Mortgage applications are at their lowest level in 22 years. However, home prices remain near record highs, driven by low supplies, and a strong job market. Is now the time to buy, or should you wait for housing prices and rates to come down?

Only you know when the time is right for you to become a homeowner, but if you’re uncertain, consider that the following:
Lansing area real estate market traditionally slows down during the holiday season and doesn’t gain momentum until early Spring.

Don’t expect housing prices to drop anytime soon. The housing shortage will continue in the greater Lansing area for as long as there are more home buyers than available home to fill the demand. One possible change may be that higher interest rates may reduce the number of bidding wars.

The Lansing area’s largest employers, such as Michigan State University, are in a continuing labor transition. This helps create a continuous housing market.

Owning a home is a long-term investment and a hedge against inflation. With rentals rates costing as much, or more, than the monthly cost of home ownership, purchasing a home is an option worth consideration. Should you stay in your home for a few years, allowing you time to build equity, you’ll likely recover your down payment, closing costs, and maintenance expenses.