January 01, 2019
Buying at Arm’s Length
When it comes to real estate transactions, it is essential—and only lawful—to buy and sell at arm’s length.
This is a case of metaphor making its way into the field of law via the market and becoming a term of art. What does it mean? The image this phrase raises in the mind is itself instructive: we hug our families, our relatives—we bring them close to the body. But the marketplace is no place for hugs. We extend our arms, shake hands—each of us standing apart from one another, meeting eyes, in the making of the fair deal.
An arm’s length transaction is a marketplace transaction made between equals. There is no duress in the transaction—nobody is being forced to purchase or sell. Nor is there any underhandedness going on—nobody has conspired to make an exchange of the property for less than market value. The concept is that both parties in such a transaction are doing their level best, from the standpoint of their own self-interest, to achieve maximal personal gain from the sale: the seller to gain a profit, and the buyer to pay as little as they are able.
For a market to function properly, every real estate transaction must be made at arm’s length. To do otherwise is fraudulent. (An example of this sort of thing would be if an owner were to fall behind on mortgage payments, then a relative agree to purchase the property for less than market value—perhaps in short sale—and then allow the initial owners to pay them rent while continuing to live on the property. This sort of collusion would serve only to undermine the area real estate market).
As such, even when a property transfer does occur between two relatives, the law in Rhode Island, Massachusetts, and Florida requires that the purchase be made at arm’s length prices—or, in other words, at market value, with title passed free and clear of judgments and defects.