Home buyers and investors often hear the term “fair market value” when talking about buying or selling a property. But what does it mean? Fair market value is defined as “the price at which a property would sell between a willing buyer and seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.”
But if you’re thinking about buying or selling a property, it’s important to have an idea of what fair market value is. And luckily, there’s an easy way to calculate it.
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In order to make intelligent decisions about your real estate investments, you need to understand what fair market value is. This article will define fair market value, or FMV, and provide a simple calculator so you can determine the approximate FMV of a property. Keep in mind that there are many factors that go into calculating FMV, so use this as a general guideline only.
WHAT IS FAIR MARKET VALUE AND WHY IS IT IMPORTANT TO KNOW?
Fair market value is a legal concept defined by the courts as the most likely price that a property will command on the open market, given reasonable, informed, and willing buyers and sellers. In plain English, a home’s fair market value is its worth based on a combination of factors including market trends, its features, and comparable homes in the area. This is different than the appraised value, which is either an expert’s opinion of worth or the assessed value of the property that a municipality uses to calculate property taxes.
Fair market value is important because it provides a good baseline for determining how much a property is worth. It’s also useful for insurance purposes – if your home is destroyed, your insurance company may pay you a proxy of the fair market value of the property, called the replacement value, if you select this option for the insured value. And if you’re selling your home, you’ll want to make sure you’re getting fair market value for it. No one wants to feel like they’ve been taken advantage of, after all. Knowing the fair market value of your property can help you avoid feeling cheated in a sale.
HOW DO YOU CALCULATE FAIR MARKET VALUE FOR YOUR HOME OR PROPERTY?
There are a number of ways to calculate the fair market value of your home or property.
• The most common method is to use a professional appraiser. Appraisers will consider a number of factors, including the location, size, and features of your property, as well as recent sales of similar properties in the area.
• Another option is to use an online tool like Zillow’s Zestimate, which provides an estimate of your home’s value based on publicly available data.
• Finally, you can simply ask a real estate agent for their opinion on your property’s value.
Ultimately, the best way to determine the fair market value of your home is to get multiple estimates and compare them.
WHAT ARE SOME FACTORS THAT CAN AFFECT FMV CALCULATIONS?
There are a number of factors that can affect fair market value calculations.
• One of the most important is location. As the old saying goes, location, location, location. Properties in desirable areas are almost always worth more than those in less desirable locations.
• Another important factor is the condition of the property. Properties that are in good condition will usually be worth more than those that need significant repairs.
• Finally, the size of the property can also impact its value. Larger properties will typically have a higher fair market value than smaller ones.
HOW DO YOU DETERMINE THE RIGHT PRICE WHEN SELLING OR BUYING A HOME IN A CHANGING MARKET CONDITION?
When it comes to pricing a home in a changing market, there are a few things to keep in mind.
• First, it’s important to stay up-to-date on market conditions in your area. This means being aware of both the overall trends (e.g., are prices rising, falling, or staying stable) as well as any specific factors that might be affecting the market in your neighborhood (e.g., new developments or major employers moving in).
• Second, it’s also important to have a realistic sense of what your home is worth. This doesn’t mean what you paid for it or how much you invested in renovations; rather, it’s an objective assessment of the current market value of your property, which often takes it cues from comparables homes near you.
• Finally, when you’re ready to price your home, don’t be afraid to consult with a real estate professional. They can provide valuable insights into current market conditions and help you determine an appropriate asking price.
RESOURCES TO HELP YOU LEARN MORE ABOUT FAIR MARKET VALUE
There are a number of resources you can turn to if you want to learn more about fair market value.
The Internal Revenue Service (IRS) website offers a free online course that covers the basics of determining fair market value. The U.S. Small Business Administration (SBA) also has a helpful guide on their website. If you’re looking for a more comprehensive understanding, there are a number of books available on the subject, such as “Valuing a Business: The Analysis and Appraisal of Closely Held Companies” by Shannon Pratt.
Of course, you can always speak to a professional appraiser if you have specific questions, or need help valuing a particular asset. Whichever route you choose, taking the time to learn more about fair market value will give you the tools you need to make sound financial decisions.
THE BOTTOM LINE
So, what is fair market value? Simply put, it’s the price that a willing buyer and seller would agree on in a transparent and competitive market. It can be used as a guideline when selling or buying property, to ensure both parties are getting a fair deal. You can use our fair market value calculator to get a ballpark estimate of what your home or property might be worth. Keep in mind, however, that this is just an estimate – for a more accurate calculation, you should contact a Real Estate professional.
