Publication: “Undue Stimulus” and the Requirements for an Arm’s-Length Sale
Given recent economic times, questions have arisen as to what constitutes an “undue stimulus” and what really are the requirements for an arm’s-length sale.
To try to answer these questions it is helpful to start with the statute. Under Wisconsin Statute section 70.32(1), to be used to value property, a sale – whether it is a sale of the subject property or a sale of a reasonably comparable property – must be arm’s-length. Chapter 70 does not define “arm’s-length.”
The Property Assessment Manual sheds light on the requirements for an arm’s-length sale. According to the Manual: “the definition of market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” Wisconsin Property Assessment Manual at 7-8 (rev. 12/12). The Manual sets forth five factors required for an arm’s-length sale:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Id. Based on the above, a sale can be rejected if one of the parties was unwilling to buy/sell, forced to buy/sell, or affected by an “undue stimulus.” See also State ex rel. Geipel v. City of Milwaukee, 68 Wis. 2d 726, 733, 229 N.W.2d 585 (1975) (“owner willing and able but not compelled to sell to a purchaser willing and able but not obliged to buy”).
The Manual provides six examples of involuntary transfers, which is a transfer in which title to real estate is transferred without the consent of the property owner:
(1) Condemnation
(2) Adverse Possession
(3) Foreclosure Sale
(4) Partition Sale
(5) Accretion
(6) Escheat
Wisconsin Property Assessment Manual at 7-5 (rev. 12/11).
By definition, these types of sales cannot constitute an arm’s-length sale because the property owner was not a willing seller.
Similarly, case law distinguishes between “normal conditions” and “necessitous conditions.” “The sale [of the subject property] must be a fair, arm’s length transaction without compulsion or pressure on either party, and the taxpayer has the burden of showing that the sale was made under normal conditions,” Geipel, 68 Wis. 2d at 734, “so as to lead to the conclusion that the price paid was that which could ordinarily be paid for the property.” State ex rel. Lincoln Fireproof Warehouse Co., 60 Wis. 2d at 90.
Normal conditions are distinguished from “necessitous circumstances which would cause the sale to be at a depressed price.” Geipel, 68 Wis. 2d at 735 (quoting Lincoln Fireproof Warehouse, 60 Wis. 2d at 98). There is a distinction between “willingness” to sell and a “compulsion” to sell. See Lincoln, 60 Wis. 2d at 97-99; Geipel, 68 Wis. 2d at 735-36.
Notwithstanding the above, in the author’s opinion, there are times when an assessor should consider foreclosure sales when setting assessments. One such time might be where a high number of foreclosure sales occurred in one neighborhood. Even though the foreclosure sales are by definition non-arm’s-length, they could shed light on property values in that neighborhood.
According to a study discussed in Fair & Equitable, the magazine of the International Association of Assessing Officers, distressed sales were very close to current market value in the market area that was studied. The study also indicated that the difference between arm’s-length sales and bank-owned re-sales was slight in that particular market area, while there was more of a difference between short sales and arm’s-length sales. Alan Smith, Distressed Sales: Anomaly or Market Value? Fair and Equitable, May 2009, Volume 7, Number 5.
Any time an assessor considers a sale involving an “undue stimulus,” extreme caution should be taken.
