Fair Market Value (FMV) is a term used in many instances. It’s typically used for larger purchases like vehicles and real estate. We’re going to focus on it as a real estate term. With real estate property being such a big purchase, it’s essential to know what it is when attempting to sell or buy a house. Determining what it is can be a complex process. Knowing what that process is will be valuable during a real estate transaction. So, let’s start by looking at the definition.
What Is Fair Market Value (FMV) of a House?
Fair Market Value (FMV) is the price a product would sell for on an open market when all conditions are met, and both sides find an equal position to buy and sell from. The key here is an open market and both sides having equal footing. Both buyers and sellers must have reasonable knowledge about the item, have undue pressure to purchase and sell, such as in a foreclosure or with job relocation, and each party behaves in their own interest. Consider these conditions when we apply them to a transaction on a property.
Knowing what concepts play into what FMV is will be able to tell you what it isn’t. It isn’t the price both buyer and seller believe the property to be worth. It is not what value a third party assigns to it, like an appraiser or even a real estate agent. It also isn’t the county-assessed value. So, knowing that when does FMV get used?
How To Determine Fair Market Value (FMV)
Fair Market Value doesn’t have a strict formula for it. Remember, it’s what a buyer and seller will agree to as a sales price for a piece of real estate. So we can think of it like a pizza. There are pieces you’ll use to determine the FMV and for each piece of real estate, the pieces may have a different density or not even be used at all. Either way, you’ll come up with what you would agree to pay for the property, and if the other side agrees, then you have Fair Market Value (FMV).
Pieces You Can Use to Determine Fair Market Value
A third-party, expert opinion would be an excellent place to start to assign a fair market value to a piece of real estate. Your best sources for that will be appraisers and real estate agents. An appraiser will give an appraisal, and it is similar to a Comparative Market Analysis from a real estate agent. They both look at comparable, recently sold properties to assess the value of the subject property. They start with properties that are as similar as possible. Things like square footage, number of bathrooms and bedrooms, age of home, and style are the basis of what most of the third-party opinions will be based on.
You should also consider market trends after looking at a third-party opinion on the property’s value. If the properties they are comparing them to are 6 months old and you’ve seen a spike in about 5% of values since then, you might consider valuing the property higher. Most third parties will adjust for this. Just remember to look at it when you are using a third-party opinion.
You also should consider comparing the price per square foot when looking at both comparable properties and the eventual average you end up with. Outliers can skew your price significantly. That’s why it’s essential to look at the price per square foot and overall price to help determine a Fair Market Value.
Fair Market Value vs. Appraised Value
As we mentioned, an excellent place to start is by using a third-party professional’s opinion of value by using an appraisal or Comparative Market Analysis. There are differences in Fair Market Value and appraised value, though. They are subtle but essential. While considering them, you should also take them with a grain of salt. Let’s talk about why.
Sales Comparison: This is the most commonly used approach. Appraisers use similarly, recently sold properties to compare and offset those differences to subject property. This is accomplished by using at least 3 similar properties within a defined geographic region within the last year. The closer the house is in comparison to location and time, the more closely accepted the price is.
Cost Approach: The cost comparison approach assumes that the current value of a house is equal to the cost of rebuilding it in its current dimensions and finishes, minus any depreciation, if the house were to be removed entirely from its current location. However, this can be problematic because the cost of rebuilding a house can sometimes exceed its value. In such cases, it would not make sense to use this approach.
Income Approach: Also called the “Income Capitalization Approach.” This utilizes the income earned on the property in comparison to the capitalization rate. The formula reads as “net operating income” (revenue the property earns minus all expenses) divided by the capitalization rate. This is typically used for commercial property and wouldn’t be used on a non-performing investment.
Appraised Value vs. Sales Price
Sales price and fair market value are very similar in that they both refer to the price at which a property is sold. However, the appraised value is generally used to determine the loan amount for a property. This is why it’s important to consider who the appraisal is for when using it to determine fair market value. In a fair market transaction, the lender often hires the appraiser to be able to mortgage the property. Therefore, they have a vested interest in an appraisal that approves a loan for the contract price. This means the appraiser may be more likely to value the property at a higher price than in a truly open market.
How Else Does Fair Market Value Get Used?
As we said, Fair Market Value (FMV) is generally used for higher-valued items. From investments such as valuable art to jewelry, cars, and real estate, FMV assigns a value to that object. Knowing the FMV of valuable items is essential as it lets you know your net worth and applies to other financial matters, such as taxes and insurance.
Fair Market Value For Legal Disputes
Fair market value is often used in critical legal matters to ensure no disagreement about an asset’s value. It is typically used in high-stakes legal situations such as divorce, the division of assets among heirs after someone passes, or when damages are done to private property. Once the fair market value has been determined, the court system can ensure a fair division of assets.
Fair Market Value For Taxes
Fair market value (FMV) differs from an assessor’s assigned property value. It is used to establish the value of your property for property tax purposes each year. For example, if your property’s FMV is $250,000 and your tax rate is 2.5%, you would owe $5,000 in yearly taxes.
FMV can also be used to calculate estate taxes, gift taxes, and inheritance taxes. These taxes are typically assessed after someone dies or after a gift over a certain value is given. The most valuable asset is typically the home, so for example, after someone dies, the FMV of the property will be used to calculate the estate tax.
Fair Market Value For Insurance Claims
Fair Market Value (FMV) are used to assign a value to an insurance policy. The insurance company will assign a cost to the policy based on that value. Typically, this will ensure a cost approach to rebuild the property. As we stated above, the cost to replace the home can significantly differ from the appraised and fair market values.
The Final Word On Fair Market Value
Fair Market Value (FMV) is an important term utilized not only in real estate, but in the insurance and legal relms as well. It is typicall used for sales as it is a price agreed to by a buyer and a seller for an item when both have no undue pressure, have reasonable knowledge of the item, and are acting in their own self interest.
It is important to understand the basic principles of FMV when calulating net worth, when buying or selling an item such as real estate, or when it’s used for insurance purposes. It will make the process easier to understand and allow for fewer disputes throughout the process.
When looking to sell your house fast to a cash buyer, like SILT Real Estate and Investments, LLC, they should help you understand an idea of what your fair market value would be around, even if their offer price is different from their assessed Fair Market Value. As it does require a second party to agree and with no undue stress, it can have a significant range. Getting an idea is one way to ensure you’re getting a fair price for your property.
If you want to see what we would assess your property’s Fair Market Value at or just want a no-obligation cash offer, fill out the short form below. Or you can contact us or call us at (708) 415-3801.