What are arm's length transactions?

Arm’s length transactions are the exact opposite of non-arm’s length transactions. In these deals, the buyer and the seller don’t know each other, so they can negotiate objectively without letting the other person influence their decision.

What is a non-arm's length transaction?

In a non-arm's length transaction, a family member can take advantage of another member and charge a higher amount than fair market value. Another type of fraud involves short sales. A homeowner who is unable to pay the mortgage may get their lender's approval for a short sale. This means they can sell the property for less than the mortgage.

Why is a non-arm's length transaction a risk?

A non-arm's length transaction may put a strain on the relationship between the two parties and may open the seller up to a tax event because of the gift tax form. For lenders, there is an increased risk of fraud if both parties are in collusion (which is generally facilitated by having an established prior relationship).