Whether you’re in the process of buying your first home or currently own a home, it’s important to understand how fair market value (FMV) plays a role in owning real estate. To start, let’s define what FMV is, how it’s calculated, and what it’s used for.
What is fair market value?
Fair market value is the price that a willing buyer will pay to an unrelated but willing seller. In other words, the fair market value of a home is what a buyer is willing to pay for the property and what the seller is willing to accept.
In real estate, FMV occurs when neither party is under pressure and both are knowledgeable about the home. And it’s not only determined from comparable properties like a comparative market analysis (CMA) or broker’s price opinion (BPO) — it also takes into account what the free market is willing to pay for the home.
Fair market value is most commonly used in real estate in legal settings. Some examples might be taxation, divorces, estates, bankruptcy, etc. Knowing the value of a property can be very beneficial. For example, knowing the FMV of a property could be used in bankruptcy to determine whether or not a mortgage is a sinking ship; making it possible for a second mortgage to be stripped.
How is it calculated?
Typically fair market value is determined through a formal third-party appraisal. Situations could include when a property is looked at for tax purposes, going through an insurance claim, or maybe inherited by an estate.
In addition, there are also informal situations where an FMV may be needed as well. Some examples of these situations could include competing for a tax appraisal, working through a divorce, or bankruptcy.
Fair market value can be determined in three ways:
1. Comparative market analysis through a realtor
2. Getting a broker’s price opinion
3. Calculating it on your own using an automated valuation model (or AVM).
You can easily do an AVM online through popular websites like Zillow, Realtor, etc. These valuation models use algorithms that sort through online databases to show you comparable properties for sale, or sold recently. While using these AVM’s can be a good start, they aren’t always the most accurate. There are some factors they might not take into account; for example, they may not touch on the quality of the neighborhood or any poor features of the exterior of the property. There are paid AVM’s on the web as well, which may give you some better insight.
Why is fair market value important?
FMV is important because it is a solid method for eliminating ambiguity or uncertainty when it comes to determining what an asset is worth. Customers and sellers often have different perceptions of value, and FMV serves as a baseboard for making sure transactions are completed in a mutual, fair way.
Are you getting the best fair market value for your home? I can help! Email me at firstname.lastname@example.org or give me a call at (443) 471-4310 for more info. You can also check out my blog for more helpful resources!