The term is used to describe a real estate transaction in which the buyers and sellers of property or a parcel of land act independently, and are not related to each other.
The idea of an arm's length transaction ensures the buyers and sellers in the real estate transaction are acting in their own self interest and are not subject to any outside influence. In a 'non-arm's length tansaction their could be other factors that influence the transaction and subsequently the value of the exchange.
This concept is important as it is a common way to determine if the price is a proxy for fair market value. If the transaction is not an ‘arm’s length’ transaction, then the stated price will likely differ from the actual fair market value of the property.1