What Is the Fair Market Value of a Property?

If you own a home, then chances are you’re familiar with the term “fair market value.” You may not think much about it, but you may be surprised at how “FMV” can affect your finances. So what is the fair market value of a property, and why does it matter?

What is the fair market value of a property?

In general, “fair market value” is what a property would fetch on the open market, assuming the buyer and seller aren’t under undue pressure to complete the transaction. Context, however, matters.

According to John Kilpatrick​​​​​, a real estate and business development expert with 35 years of experience in the field and author of “Real Estate Valuation and Strategy,”, the terms “fair market value” and “market value” are often used interchangeably.

“MV is the preferred term among appraisers and FMV is preferred by accountants,” Kilpatrick said. “Brokers, government agencies and tax assessors may use either interchangeably.

“Market value means the most probable price which a property should bring in a competitive and open market [in] a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus,” he added.

In a “fair” transaction:

• The buyer and seller are “typically motivated.”
• The buyer and seller are each acting in their own best interests.
• The property has been available for purchase on the open market for a reasonable amount of time.
• The transaction is typical in that cash is used for the purchase (instead of goods), and there aren’t special concessions or creative financing that could affect the sale price.

Fair market value vs market value

Although property owners and others may think of these terms interchangeably, FMV and MV are not always the same thing. And how they’re used often depends on the situational context and market factors, even though the amounts tend to be similar.

“Fair market value and market value are usually similar values,” said Phil Georgiades, the Chief Real Estate Agent at FedHome Loan Centers.

“Fair market value is usually used in tax or legal contexts because it is not just the market value of the home, which can be determined simply by looking at currently active and recently sold listings,” Georgiades said. “The FMV assumes that both buyer and seller have full knowledge of the property and that neither is under any particular pressure to complete the transaction.”

Market value, on the other hand, sometimes incorporates motivations or factors that influence the price.

“The market value of a property could be different if either party has more incentive to buy or sell than the other,” Georgiades said. “If there is an oversupply of homes, it is a buyer’s market and the fair market value may be higher than the market value. If there is an undersupply of homes for sale, then it is a seller’s market. In this scenario, the market value may exceed the fair market value.”

Why is the fair market value of my home important?

There are several situations where your home’s fair market value matters a great deal. Refinancing a mortgage, filing an insurance claim and settling an estate are just a few of the times when FMV is important, even if the property isn’t put up for sale.

Divorce can be especially problematic when the home’s FMV isn’t what it once was.

“One example of how FMV can affect someone’s finances is if they purchased a property at a higher price and then there is a recession,” said Georgiades. “If they are trying to divide the asset by fair market value, they may find that they are overpaying for their share of the asset.”

Other ways fair market value can affect your finances include:

• Estate settlement. Fair market value may be the buyout price in a private transaction between beneficiaries.
• Insurance claims. If your home’s fair market value fell, you could find that the insurance settlement doesn’t cover replacement. But if it rose, you could be in a better position financially.
• Refinancing. If your home’s fair market value fell, then you might not have enough equity to refinance at a favorable rate.

Kilpatrick agreed.

“For the majority of Americans with positive net worth, the majority of that net worth is tied up in the equity in their homes. They can borrow against that equity in times of distress, pay college tuition for kids or medical bills, or frankly, for any reason,” he said.

How to determine the fair market value of a home

There isn’t a hard-and-fast rule that defines how to determine fair market value, but Kilpatrick suggested an easy-to-follow methodology.

“A layperson can estimate fair market value by looking at recent sales of comparable properties,” he said. “Generally, tax-assessed values are problematic for the layperson.”

Kilpatrick suggested using the following guidelines for estimating your property’s fair market value:

Research recent sales. This should be easy, thanks to the internet. “Online property search sites are all really good sources for such comps, and provide data on property, characteristics and sales prices,” Kilpatrick said.

Find recent comparable sales. A true comparable or “comp” will be in the same school district and neighborhood, but other factors, such as number of bedrooms and bathrooms, age, size and quality are also important. “You’ll also want to find sales of comps with similar amenities, such as brick versus wood siding, number of fireplaces, garages, etc.,” said Kilpatrick.

Choose comparable properties that “bracket” your home. “You will want to find comps that bracket your home—a couple of them smaller and a couple larger,” Kilpatrick said.

Calculate your home’s estimated fair market value. The average price of three or four comps is a good estimate for your home’s fair market value.

Markets can be fickle things

Whether you’re about to sell your home, refinance your mortgage or finalize a divorce settlement, your home’s fair market value will affect your finances. One piece of advice to consider from Kilpatrick concerns pricing.

“The sweet spot in any neighborhood is the 90th percentile of home values,” he said. “Right around that point, you will maximize value and minimize marketing time.”