Certified Residential Appraiser Practice Exam

What is the primary characteristic of an arms-length transaction?

1. A transaction between family members

2. A transaction with full knowledge of all parties

3. A market-driven sale with limited knowledge

4. A transaction influenced by external pressures

The correct answer is: A transaction with full knowledge of all parties

An arms-length transaction is defined by the principle that both parties involved are acting in their own self-interest and are fully informed about the terms and conditions of the deal. This means that each party has an adequate understanding of the market value of the property and is not under any undue pressure to engage in the transaction. The emphasis here is on fairness and the absence of any relationship between the buyer and the seller that could influence the outcome. In such transactions, the parties negotiate freely without coercion, ensuring that the terms reflect a market-driven exchange. This characteristic is critical for appraisers, as it establishes the integrity of the sale price and serves as a reliable indicator of market value. Transactions that do not meet this criterion, such as sales between family members or those influenced by external pressures, do not provide an objective measure of the property's true market value.