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How Fair Market Value is Measured
What Exactly Is Fair Market Value?
Fair market value estimates the value of a property based on what a knowledgeable and willing buyer would likely pay for it. It is, by both name and practice, the most reasonable way of determining the actual value of a home. Fair market values are usually founded either on precedent or extrapolation, differing from intrinsic value in the sense that this takes the decision of value out of a subjective viewpoint.
In other words, it’s home market value in conditions where both parties are knowledgeable and unpreserved. This is the legal definition that’s recognized by the IRS, bankruptcy courts and many state codes and regulatory bodies. Calculations of the market value of a home will also come into play when:
- Eminent domain seizure is in the works
- The property is tied up in estate or probate
- The owners are in divorce proceedings
- The home is being put on the real estate market
The term “fair market value,” however, has fallen somewhat out of favor in the real estate industry, in lieu of “market value.” Consider the two terms to be interchangeable.
How Is Fair Market Value Determined?
There are only a couple of steps in the process of determining a home's fair market value, usually. Real estate professionals draw up a Comparative Market Analysis (CMA) to get a ballpark idea of what the market value of a home should be. That’s taken from a reading of the house market value in the area and seeing what other comparable homes sold for.
From there, an appraiser is called in to do a thorough, detailed assessment. That will entail looking at “comparables” of house market value for the area, then doing a physical inspection of the property. The appraiser’s approach for determining home market value will also involve looking into public-record information and running all the data through a set formula. The appraiser reaches an exact and impartial dollar figure; it’s what a seller should ask and what a buyer should pay.
“Fair market value,” “house market value,” and “market value of a home” are not static numbers. Conditions change, neighborhoods change, houses deteriorate (or are improved on) and various other factors may drive the real estate market. A home market value from as little as two years ago may be completely irrelevant now.