In real estate terms, what characterizes an arm's length transaction?

An arm's length transaction is characterized by the buyer and seller acting independently, without any pre-existing relationship that could influence the terms of the sale. In such transactions, both parties negotiate at arm's length, meaning they do not have any special interests in the outcome beyond their individual objectives.

The correct choice indicates a scenario where the buyer and seller do not know each other, which minimizes the likelihood of any favoritism or undue influence in the negotiation process. This independence ensures that the price reflects the true market value of the property, as both parties are motivated solely by their interests, aiming for the best deal possible.

In contrast, situations like James buying his own listing or Meredith purchasing her mother's home involve familial or personal relationships that could affect negotiating power and price. In these cases, the potential for a conflict of interest exists, possibly leading to prices that do not accurately represent market conditions. Similarly, when two neighbors trade houses, the established relationship may influence decisions, making it less likely to be considered a true arm's length transaction. Thus, the third choice accurately represents the defining characteristics of an arm’s length transaction.