In this edition of Lamudi Q&A, we discuss the general definition of fair market value in real estate.
Anybody who has ever embarked on selling or purchasing real estate has likely heard a lot about their property’s fair market value (FMV). In the same extent, those who have had to pay real estate tax or pursue a real estate–related deduction have also had to determine the subject property’s FMV.
In this edition of Lamudi Q&A, we discuss the general definition of FMV and some of the factors commonly taken into consideration during a real property’s valuation.
Q: What Is Fair Market Value?
A: Fair market value, in real estate, is defined by the Merriam-Webster Dictionary as the price of property that buyers and sellers with reasonable knowledge of pertinent facts and are not acting under any compulsion are willing to do business.
Specifically, the expanded definition of FMV is that it is the probable price at which a willing buyer will transact with a willing seller provided that (1) neither are related with each other, (2) they both know the facts, (3) neither are under the compulsion to buy or sell, and (4) that all rights and benefits inherent in or attributed to the property are included in the transfer.
How Is Fair Market Value Determined?
There has yet to be a truly official way to establish FMV for real estate, but almost every valuation ultimately comes down to two considerations: current real estate appraisals and the most recent similar sales figures from a comparable market.
Every real estate valuation comes down to two considerations: current real estate appraisal and the most recent sales figures from similar properties.
Real estate appraisals are actually a par for the course in the sale of a property. In the simplest terms, appraisals are professional opinions of value. During a sale, the financial institution (usually a bank) that extends a loan has a real estate appraiser to make a professional opinion about the value of the property involved as of a specific date.
Comparable market analysis, on the other hand, is determining the sale prices of similar properties that had been sold in the last two to three months. Adjustments in the price would be made to take account for the differences in size, location, and condition of the subject property from the similar reference properties.
Of course, there are other considerations that could also greatly contribute to the determination of a property’s fair market value. This includes current market trends, where the levels of demand and supply in both the sellers’ and buyers’ markets are taken into consideration. Other circumstances, such as foreclosure, can help determine the FMV of a property.
