Selling a property to someone you know can seem straightforward. After all, there’s already trust, familiarity, and an understanding between both sides. But in real estate, if you sell to someone you have a personal connection with, it’s called a non–arm’s length transactions, and they come with rules and considerations many buyers and sellers don’t expect.
Let’s walk through how these transactions work, where the risks show up, and what to keep in mind before you move forward.
Main Takeaways
- Non–arm’s length transactions involve buyers and sellers who already have a relationship, which can influence how you price, review, and document your deal.
- Because of that connection, lenders and appraisers tend to take a closer look, especially when it comes to fair market value, disclosures, and financing rules.
- Taking a careful approach. Being transparent, documenting everything, and getting the right professional support can help you protect both the investment and your relationship with your business partner.
What Is a Non–Arm’s Length Transaction?
A non–arm’s length transaction happens when the buyer and seller already have a personal or financial relationship that could influence the deal. And since they are connected, the sale isn’t viewed as fully independent or purely market-driven.
In our experience as property managers in Philadelphia, this is something we see in family transfers, investor partnerships, and off-market deals where relationships play a role in how you structure the transaction.
That said, in a standard transaction, both parties are assumed to act in their own best interest. They negotiate price and terms without outside influence. In a non-arm’s length transaction, on the other hand, that assumption doesn’t automatically apply. The relationship between the parties may affect their pricing, concessions, or even how they structure the deal.
Because of those added connections, lenders, appraisers, and regulators tend to look more closely at these transactions. Not to block the deal, but to make sure the numbers hold up and that no one is receiving a hidden benefit that isn’t reflected on paper.
In practice, non–arm’s length transactions often show up in familiar situations. A parent might sell a home to a child. A long-time friend could buy an investment property off-market. Sometimes it’s an employee purchasing from an employer, or business partners transferring ownership between themselves. You’ll also see them in deals involving companies with shared ownership or control.
Even so, none of these situations is illegal on its own. They simply need more care. If you have clear disclosures and proper paperwork, you can help everyone see that the deal is fair.
Arm’s Length vs Non–Arm’s Length Transactions: Key Differences
The main difference between an arm’s length and a non-arm’s length transaction comes down to whether or not the buyer and seller have any ties that impact their transaction. In a non-arm’s length transaction, the buyer and seller have a pre-existing relationship, while they don’t in an arm’s length one.
In an arm’s length transaction, the buyer and seller act separately. They negotiate freely and have no personal or financial ties that influence the deal. Meaning, the market shapes your price and terms.
In a non-arm’s length transaction, that independence doesn’t fully exist. Because the parties already have a relationship, outside reviewers can’t automatically assume the sale reflects fair market value. That’s why they approach these deals with more caution.
The distinction becomes clearer when you compare these transactions side by side.
Arm’s Length Transaction |
Non–Arm’s Length Transaction |
| Buyer and seller are unrelated | Buyer and seller have a prior relationship |
| Negotiations happen independently | Relationship may influence terms |
| Price reflects open market conditions | Price may differ from market value |
| Minimal extra scrutiny | Requires added documentation and review |
As you can see, neither type is “better” or “worse.” The difference is how the transaction is evaluated. Arm’s length deals follow standard expectations, while non-arm’s length transactions must prove that your terms are fair, transparent, and properly disclosed.
The Risks and Challenges of Non–Arm’s Length Transactions
Non–arm’s length transactions aren’t risky just because of the relationship involved. The risk actually comes from how those relationships affect your pricing, disclosures, and documentation. Even well-intentioned deals can raise red flags if they aren’t handled carefully.
Here are the most common ones:
Risk or Challenge |
Why It Matters |
| Pricing below or above market value | If your price is influenced by personal relationships, it may not reflect true market conditions. That can raise red flags during the appraisal or financing process. |
| Increased lender scrutiny | Lenders often require extra documentation to confirm the transaction is legitimate and fairly priced. |
| Appraisal issues | Appraisers may struggle to support the contract price if comparable sales don’t align with the agreed terms. |
| Disclosure requirements | Failing to fully disclose the relationship between the buyer and seller can delay your approval or jeopardize the deal altogether. |
| Financing limitations | Large down payment. For example, FHA loans often require a 15% down payment for arm’s length deals unless certain family exceptions are met. |
| Potential tax implications | If you make a transfer between related parties, it may trigger tax concerns if the sale price doesn’t reflect fair market value. Or, if you sell below value, it may require you to file IRS Form 709 (Gift Tax Return) to report the “discount” as a gift. |
| Higher risk of disputes | When you don’t clearly document your expectations, personal relationships can complicate disagreements later on. |
How to Protect Yourself in a Non–Arm’s Length Transaction
When a deal involves someone you know, it’s easy for many people to lean on your trust and skip the usual transaction steps. However, the safest approach is to slow things down, stick to protocol, and treat the deal like a business decision, because it really is.
Start by being clear about the relationship. Lenders and appraisers need that context. This allows the equity you’re giving away to count toward the buyer’s down payment. This potentially helps them qualify for financing without needing as much cash upfront.
Next, look at the numbers. As we said, non-arm’s transaction sometimes overlooks the market value because you are familiar with the other party. Many investors we’ve worked with have found that if you get an independent appraisal, it can help you confirm you have a fair market value. Even when both sides agree on the price, a third-party opinion can keep their expectations grounded.
After that, put everything in writing. We say it over and over to our clients: verbal agreements don’t always hold up. So, clear contracts and documented terms give everyone in the deal something to refer back to if questions come up later.
Additionally, get another set of eyes on the deal. That is, a real estate agent, attorney, or property manager who can step in without personal bias and point out issues you might overlook.
Lastly, don’t rush the process. Non–arm’s length transactions usually take longer because more people need to review the paperwork. Giving it time helps you avoid mistakes that can cost you later.
A Disclaimer
We’re only providing general information in this article for educational purposes only. While we aim for accuracy and reliability, the information shared is not meant to be relied on as legal, tax, financial, or specific regulatory advice. We strongly recommend that you always consult with a licensed attorney, CPA, or other qualified professional in your specific jurisdiction for advice tailored to your unique circumstances, as reading this blog does not establish a client or advisory relationship with BMG.
Get Your Rental Right with BMG
Non–arm’s length transactions happen more often than people realize. The issue isn’t the relationship itself — it’s how the deal is handled. When buyers and sellers already know each other, things like price, paperwork, and disclosures matter even more. The safest approach is to slow down and run the deal like a proper business transaction.
In the meantime, when it’s time to run your property as a rental, Bay Property Management Group is here for you. Our experienced team works with investors to help keep your operations on track. We can help you maintain your market value, spot potential issues early, and make sure you document everything the right way. Whether your business is big or small, we’re here to help you move forward without nearly as much stress. Contact us today!
