What Is Fair Market Value (FMV) In Real Estate And How Is It Calculated?

A home is one of the most expensive purchases people make in their lifetime. As such, buyers, sellers and investors alike are all very concerned with getting an accurate fair market value of a property. But determining the fair market value is a nuanced process that takes multiple factors into consideration.

We’ll discuss what fair market value is, how it can be calculated and where else fair market value applies.

Fair market value (FMV) in real estate is the determined price that a property will sell for in an open market. The FMV is agreed upon between a willing buyer and seller, both of whom are reasonably knowledgeable about the property in question.

To determine what fair market value is, it’s better to first look at what FMV isn't. Fair market value isn’t what you (the buyer or the seller) think the value is, it’s not necessarily the appraised price and it also isn’t the tax value.

Unlike other aspects of buying and selling real estate, there isn’t a defined formula for determining the fair market value of a home.

Since pieces of real estate are sold on the open market, the value of these financial assets are subject to the fluctuations of that market. Namely, supply and demand. Because of this, the buyer and seller’s individual circumstances and desire to buy and sell will greatly impact the fair market value of a home. This is why “fair market value” isn’t always what a piece of real estate is actually worth – it may depend upon what it is worth to either the buyer or seller.

With this in mind, here are the following ways a rough FMV can be calculated:

• Agree on a price: A willing buyer and a willing seller can agree upon a property’s value based on their reasonable knowledge of the property and current market trends.

• Use a comp analysis: A comparative market analysis will check out similar properties in the area to give you a better idea of what the fair market value of your property could be.

• Get an appraised value: A real estate appraiser can determine the property’s valuation. While not the final word on FMV, the appraised value can often suffice in the event a fair market value is needed. An appraisal also reinforces what a lender will allow a consumer to borrow on a home which often becomes by default an approximation of value on the open market.

• Find the price per square foot: You can also calculate a rough price per square foot. Look at comparable homes in your neighborhood then divide by square footage. Then take that dollar amount and multiply by the number of square feet in your home.

Fair market value isn’t just for those buying and selling real estate. Realistically, every current homeowner needs to stay knowledgeable on the FMV of their home. This affects their net worth and the value of the asset itself. It also impacts a variety of other potential financial concerns, from taxes to insurance.

Insurance Claims

Homeowners insurance takes into account the fair market value of the home when determining how much to charge for a policy, including how much it would cost to replace the home (in the event of a fire or flood, for example.)

This “cost to replace the home” is an important distinction, as the replacement cost of a home is determined by current fair market value and not necessarily what you paid for a home.

Remember, fair market value is determined by what the buyer and seller both agree to pay. For example, if you had a homeowner who needed to sell the home quickly, maybe the buyer paid less than the home’s actual value at that time. Alternatively, if homes in your neighborhood suddenly become very popular, the replacement cost would go up to accommodate for this fluctuation in circumstances.

Property Taxes

Fair market value of a home is also used to calculate a homeowner’s property tax bill each year. Each municipality has its own tax rate. For example, if your home is appraised at $300,000 fair market value and the property tax rate in your county is 3%, you would owe $9,000 in property taxes each year. 

Fair market value also affects other taxations where property and real estate are in play: the estate tax, gift tax and inheritance tax. If an heir receives a home in an inheritance, or as a gift, they’ll have to pay taxes on the fair market value of the home – regardless of how they came to own the property or if someone “gifted” it to them for free.

Legal Disputes

Fair market value also becomes a very important (and often hotly contested number) when it comes to settling legal disputes, such as during a divorce settlement, when damages are done to private property or when two heirs are given one piece of property and one needs to buy out the other.

Fair market value keeps all parties on the same page as to the value of any and all shared assets and keeps one party from being able to take advantage of the other.

Let’s discuss some of the most frequently asked questions surrounding FMV.

Can an appraiser tell me the fair market value of my home?

A real estate appraiser can find the appraised value of a home, which can be used if a fair market value is needed. Appraisers determine a home’s valuation which helps lenders figure out how much they are going to let a potential buyer borrow on a home.

How can I calculate the fair market value of my home?

There are a couple of different ways you can calculate the fair market value of a home. You can agree on a number with the buyer after doing your own research, perform a comp analysis, hire a real estate appraiser or calculate the price per square foot.

What else does FMV impact?

Fair market value isn’t just important to the home buying and selling process. Homeowners should understand that fair market value can impact their homeowners insurance claims, property taxes and other relevant legal disputes.

Fair market value isn’t just a fancy term that real estate agents made up – it’s a number that impacts almost everything: sales, insurance, inheritance and more.

It’s also important to note that fair market value can be calculated in a variety of ways and needs to be agreed upon by the buyer and seller. FMV is also important for calculating property taxes, insurance claims and settling legal disputes where property is involved.

If you’re in the process of becoming a homeowner, get started on your application today.