Updated on April 25, 2025

In the realm of real estate, an “arm’s length transaction” is a deal in which the buyer and seller act independently and have no pre-existing relationship. Both parties aim to secure the best terms for themselves without being influenced by familiarity, kinship, or any outside interests. This independence ensures that the transaction reflects fair market value, a critical component in accurately assessing property worth and upholding the integrity of real estate markets.

What is an Arm’s Length Transaction?

An arm’s length transaction in real estate is a sale between independent parties who have no existing relationship and act solely in their own financial interests.

This independence ensures the property price reflects fair market value, free from emotional bias or manipulation.

Because there is no undue influence or familial connection, an arm’s length transaction supports legal integrity and reduces the risk of valuation disputes. It plays a critical role in:

• Protecting lenders who rely on accurate valuations to assess loan security

• Ensuring tax authorities like the IRS can differentiate between a true sale and a disguised gift

• Maintaining transparency in California real estate under Civil Code section 1102, which mandates full disclosure of property conditions.

Example of an Arm’s Length Transaction

A homeowner in Los Angeles sells their property to a buyer they found through a real estate agent. Neither party knows the other personally. The buyer performs inspections, negotiates the price, and both sides are represented by independent agents.

This structure meets the definition of an arm’s length transaction because:

• The price is based on fair market value

• Both sides act independently

• There is no conflict of interest or familial relationship

• All disclosures required under California Civil Code section 1102 are provided

Example of a Non-Arm’s Length Transaction

A father sells a house to his daughter at a heavily discounted price, without involving real estate agents or appraisals. In this case:

• There is a pre-existing relationship

• The sale may not reflect the true market value

• The IRS may classify it as a gift, potentially triggering tax consequences

Why Is an Arm’s Length Transaction Valuable?

The primary value of an arm’s length transaction lies in its transparency and fairness. When a property is bought or sold in such a manner, there is confidence that the price has not been manipulated or skewed by undue influence.

This has significant implications for lenders, tax authorities, and future investors, all of whom rely on honest and fair property valuations to make informed decisions.

Arm’s length transactions are particularly important in securing mortgage loans. Lenders want assurance that the property’s price accurately reflects its market value so that their financial risk is minimized.

Likewise, tax assessors depend on these transactions to correctly determine property taxes, ensuring that the public revenue system remains equitable.

In litigation, an arm’s length transaction can show the true value of the property as opposed to an appraisal which is just an opinion of value and is often based on necessarily incomplete hypothetical assumptions.

How Arm’s Length Works in California

In California, arm’s length transactions adhere to the same fundamental principles as in other states but also come with specific nuances due to the state’s unique regulatory environment and market conditions. For instance, California law emphasizes disclosure and transparency in property transactions. Parties involved in an arm’s length transaction are required to fully disclose all pertinent information, such as the condition of the property, to avoid any conflicts or misunderstandings.

In non-arm’s length transactions, like those involving family members or affiliated business entities, additional scrutiny is often applied. For instance, California law may mandate more detailed documentation or even regulatory oversight to ensure no party gains an unfair advantage, which could impact taxation or financing.  In any event, California’s disclosure statutes, as set forth in Civil Code section 1102, et seq. are generally not waivable.

What Can Go Wrong Without an Arm’s Length Transaction?

When a real estate transaction is not conducted at arm’s length, numerous issues can arise. A property might be sold for a price that does not reflect its true market value, potentially leading to inflated or deflated pricing. For lenders, this represents a significant risk, as they may be lending on a property worth much less than the agreed price, which jeopardizes the security of the loan.

Non-arm’s length transactions are also prone to scrutiny by the IRS and tax authorities. If a property is sold at an artificially low price to a relative, for example, the IRS may view it as a disguised gift and impose tax consequences. Additionally, these transactions are more susceptible to legal disputes, especially if one party feels misled or taken advantage of after the deal has closed.

Schorr Law Understands

Navigating the intricacies of real estate real estate disputes requires expertise, especially in ensuring the deal is conducted fairly and transparently.

If you are facing disputes or have concerns related to the purchase or sale process, Schorr Law’s experienced team is here to help.

We specialize in resolving complex real estate issues and can provide the guidance you need.

Call us today at 310-954-1877 or fill out our contact form here.

FAQs

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

An arm’s length transaction occurs when the buyer and seller act independently without any relationship, ensuring the property is sold at fair market value. This setup minimizes the risk of bias or manipulation.

Why are arm’s length transactions important in California?

California enforces strict disclosure requirements in real estate, especially under Civil Code section 1102. Arm’s length deals help ensure compliance, transparency, and accurate property valuation, which is essential for lenders, tax authorities, and legal clarity.

What’s the difference between an arm’s length and non-arm’s length transaction?

An arm’s length transaction is conducted between unrelated parties, while a non-arm’s length transaction often involves family members or affiliated entities. The latter may invite scrutiny due to potential undervaluation, tax implications, or conflicts of interest.

Do arm’s length transaction laws vary between states?

Yes. While the core concept remains consistent, states like California have specific laws emphasizing disclosure and fair dealing, which may not be as stringent in other regions.

How do I contact Schorr Law’s real estate attorneys?

You can reach Schorr Law at 310-954-1877 or filling out the contact form here. Schorr Law Attorneys specialize in real estate transactions and dispute resolution throughout California.