If the real estate appraiser utilized the income approach, the fair market rent will be calculated. The best way to determine the fair market rent is to review a real estate appraisal prepared for the owner-occupied real estate. Here are a few recommended methods to determine a fair market rent: In order to find the fair market value of a business in an arm’s length rental agreement, the actual rent paid by the company (if any) is added back to its net income and then the fair market rent value is subtracted. A valuation analyst must assume that a hypothetical buyer of the business would not benefit from the existing relationship between the business and real estate. Because this pre-existing relationship between the tenant and landlord, the owner of the company may be leveraging that relationship to better negotiate the amount of rent the company pays or reports on its income statement as opposed to a fair market value. However, if the rental agreement falls into the category of a non-arm’s length transaction, then a rent adjustment will have to be made to find the fair market value of a business. Generally, if the real estate is leased from an unrelated third party in an arm’s length agreement, a rent adjustment will likely not have to take place. A company’s rent expense is one of a company’s largest expense and can therefore also affect the value of a business. When determining the fair market value of a business, a company’s rent expense must be first evaluated to determine if it was an arm’s length transaction or a non-arm’s length transaction. Commonly in a non-arm’s length transaction, either the company itself owns the real estate, the owner(s) of the business personally own(s) the real estate, or a separate but related holding entity owns the real estate. However, in a non-arm’s length transaction, also known as an arm-in-arm transaction, the buyers and sellers have an existing relationship, whether business-related or personal. In this type of transaction, the buyer and seller act independently without one party influencing the other. 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.In real estate, arm’s length transactions refer to a business deal where parties involved have no previous relationship prior to negotiating an agreement. In my opinion this has the potential to cause all kinds of problems, depending on how they decide to use the data. From what I’ve been told by different “real estate mavens”, this is supposed to prevent future problems regarding appraisal values. 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. “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.” “ A transaction between unrelated parties who are each acting in his or her 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.įrom The Dictionary of Real Estate Appraisal 5 th Addition 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.ĭefinitions of an arm’s length transaction:Īn 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. 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. 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. 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.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |