Do you wonder what is fair market value? Put simply, it’s a price that any asset could sell for if it were placed on an open market.
Fair market value is a concept that carries tremendous implications in many different situations. As a homeowner, you need to have some idea when it will apply and how the determination is made. You should also know how it can change over time and how any changes in it can impact you in a variety of different circumstances during your time as a homeowner.
Fair market value represents an asset’s price under a typical set of circumstances:
- Possible sellers and buyers have a reasonable level of knowledge regarding the asset in question
- Prospective buyers/sellers are acting in their best interests
- Involved parties aren’t any under undue stress or pressure to make a trade or deal
- Everyone has a reasonable amount of time to finish a possible transaction
When these conditions are all met, the fair market value of an asset theoretically represents an accurate assessment of what it is actually worth.
What Separates Fair Market Value From Other Terms
The terminology ‘fair market value’ is deliberately different from similar phrases or terms. These include appraised value or market value. FMV is different because it takes into consideration the economic principles involved with free, open market actions. On the other hand, market value is just a reference to an asset’s price in a marketplace. You can easily look up the market value of a home by looking up its current listing. However, FMV proves more complex. Likewise, the appraised value is really just the opinion that an individual appraiser determines. However, appraisals are often used in the determination of FMV.
FMV is a concept used frequently in legal matters. Certain examples include but are not limited to the following:
- Determining real estate worth in a divorce settlement
- Calculating compensation in government eminent domain cases
- Tax deductions following casualty losses
Why Is Fair Market Value Important?
This concept matters a great deal if you own a home. Knowing the FMV matters in certain situations involving mortgages, taxes and insurance, but perhaps never more than if you intend to sell.
If you hope to sell your home, then you want someone to buy your home at the price you are asking for it. If you price your home too high, though, it can wind up sitting on the current market for quite some time. On the other hand, pricing it too low can wind up costing you the money you could have otherwise made.
Assessment of Worth
In the process of selling your current home, you will have someone assess and appraise it. This determines an assessment of worth, as the assessor tells you what they appraise the current value of your home as being. This valuation isn’t identical to FMV, but it’s a solid step in that direction.
Market factors are what might separate an appraisal from actual FMV. Assume an appraiser calculates a fair market price of $250,000 for your home. Also, assume that your neighborhood is moving up in terms of desirability and value. That might mean the actual market value of your home is $275,00 to even $300,000, just because buyers are willing to pay more to live there as home values rise.
FMV also matters in locales where municipal governments collect property taxes based on property values. If you own a home for a significant-enough stretch of time, then the FMV is likely to rise. That can lead to higher property taxes than when you first bought it. Determining current FMV helps you anticipate or even fight new levels of taxes, not just with local property taxes but also in matters of tax credits, estate taxes and gift taxes. Gifting your home to a descendant or survivor for the legal minimum of $1 might seem like a simple thing to do, but it won’t always evade taxes that would get charged at an FMV rate instead of that single dollar.
Another time FMV comes into play is when you need to make an insurance claim after property damage. If your home has a below-FMV evaluation, then your insurance compensation following a natural disaster might not recover all of your losses, just how an older car might be ‘totaled’ after a wreck.
Calculating Fair Market Value
No specific formula exists to determine FMV, considering the always changing conditions of free and open markets where buyers and sellers interact. Having said that, there are certain factors often involved:
- Reasonable property knowledge
- Understanding free/open market economics
- Current activity specific to local property market
- Comparisons with similar properties based on size, age and updates
Does Fair Market Value Impact Buyers?
A home’s appraised value can possibly impact the capacity of a prospective buyer to get a loan for the home. If the home’s appraised value comes in a lot lower than your asking price, lenders might make buyers contribute more of a down payment.
Learn More About Fair Market Value Today
As you can see, determining fair market value is important for many reasons, but it can also be rather complicated. Doing as much research as you can on your own helps you make informed choices when it comes to big decisions. However, this is one where eventually a professional appraiser has to take over.
If you’re wondering what is the fair market value for your current home, then you need a professional to come out and do an appraisal for you. If you’re interested in a free quote, call us at 1-801-882-2292!