The arrest was announced at a Wednesday afternoon press conference. Authorities would not say if the family member arrested is Smith's 16-year-old half brother.
"One of the things I want to stress is that this was a domestic issue within that residence, and that there is no stranger in the city of Menifee that caused this to happen," Menifee police Chief John Hill said.
Around 1 a.m., someone from the Smith home called police to report possible human remains buried in the backyard. When officers arrived, they found a shallow grave less than 100 feet from the home.
The identity of the remains has not been confirmed, though authorities said the remains are of a male juvenile that fits Smith's description.
The Riverside County Sheriff's Department said Wednesday the search for Smith has been suspended. Investigators served a search warrant at the boy's house, and the mother, her partner and Smith's half brother were interviewed.
Smith, 11, was initally said to have been last seen in the brother's room Saturday night. But the story changed Wednesday when the brother revealed to officials that he saw Smith following him to a friend's house that night. Once he realized Smith was following him, he told him to go home. Smith then disappeared.
According to the family spokesperson, the brother didn't reveal that information at first because he was scared.
Crime tape blocked the street that led to the boy's family home as the investigation continued. Officials said Smith's family was cooperating.
On Tuesday, volunteers had to suspend their efforts overnight due to dangerous conditions. Organizers say more than 700 volunteers walked through thick brush and 100-degree heat searching for Smith.
The developments have shocked and saddened those who searched for the boy.
"Shock. Hurt. Anger. Regret, for some reason, because I was talking to him," said Sue Emory, who spoke to someone believed to be the 16-year-old family member Tuesday night.
"I was telling him how we were supporting him, and loving him, and all the bad stuff that had been written about him, shame on the community for judging without knowing," she said, recalling the conversation. "And he was so gentle and kind-sounding, you would never know."
Smith's mother and her partner spent several hours at the sheriff's station in Perris for questioning. Authorities have not said what role they had in this case, but they are not facing criminal charges.
Community holds vigil for Terry Smith
The hundreds who searched for Smith held a vigil for him Wednesday night. Balloons were released honoring the 11-year-old at the tearful candlelight vigil that drew a massive crowd.
Members of the family attended the vigil. They did not want to go on camera but issued a statement.
"This has been a devastating week for our family and for everybody involved in the search," the statement read, in part. "This community has been amazing and we appreciate all the support."
It has also been learned that Smith's family and the school district disagreed about whether the boy was ever diagnosed with autism.
"I know it's going to be a bit of a shock to people to hear this, but no, he was not autistic," said Jenny Smith, who says she taught the boy.
Anyone with information is asked to contact the Riverside County Sheriff's Department at (951) 776-1099.