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Fair Market Value (FMV)
The fair market value (FMV) of a property is the estimated price a buyer and seller, who are both under no pressure to buy or sell, would agree on for a sale transaction to occur.
Even though there are various methods to value property, fair market value is a reflection of what the reality in a market is actually like.
As we all know, appraisers, agents and homeowners can all have their ideas of what a house is worth.
But that counts for nothing when there are no buyers willing to pay what they perceive as an inflated price.
The opposite can also occur when a house is listed for a specified asking price but ends up selling much higher due to competing bidders in the open market.
In booming real estate markets for example, it’s not uncommon for properties to sell at 30% above it’s appraised value.
This is why fair market value is not a figure that can be worked out by formulas and equations.
Common sources of fair market value
While it can be a complete waste of time for a homeowner to calculate the fair market value of a house, there are some commonly referenced sources that are generally accepted as providing the most credible estimate of what FMV of a property would be.
The first is the IRS.
In order to calculate property taxes, tax assessors need the property value as a variable for their equations.
And as there are millions of homes to account for, they need to apply a systematic way to work out the property tax to be collected for each property.
So the value estimates they use to determine property tax rates for each individual house are important numbers which they want to get wrong by a long shot.
Sometimes the workings behind these estimates might be disclosed like using market rental as a factor.
Sometimes not much are disclosed but most believe factors like square footage, transaction records and market data are used.
In any case, the assessed property value estimate provided by the IRS is one of the most common ways for people to estimate FMV.
Estimates tend to be more prudent than extravagant as governments wouldn’t want to face the backlash from unhappy homeowners who feels that they are unfairly treated.
The second source is appraisal companies.
The appraised value is probably the most common home value used by real estate service providers.
These include lenders who need it for determining a loan to value, sellers and buyers to decide a cash-over-valuation, market watches to judge the demand in the market, etc.
If the professionals are using it, surely it is dependable as a FMV?
Estimates tend to be more optimistic than pessimistic as service providers tend to make more profits from higher priced property.
A third source are insurance companies.
These financial institutions mean business with their numbers.
After all, their whole business model are based on numbers.
They need to work out fair market value of homes in order to underwrite insurance policies so that there is enough coverage to entice customers and not too much to potentially make a loss.
They also have their own methods to determine property value… which would probably also account for the estimates from the IRS and appraisers.
Estimated FMVs can be expected to lean towards the low side as insurers want to reduce claims for coverage.
A fourth source is real estate agencies.
Real estate agencies have access to a wealth of up-to-date market data and are expected to have a good grasp of FMV.
They are the people on working on the grounds after all. If there’s any party who knows a property in a particular neighborhood best, the bet would be on the local agents.
The most common users of valuations estimated by agencies are home buyers and sellers.
These numbers used a lot of comparison data such as sales and conformity to finalized. And are most in touch with the emotional value of houses.
They also tend to be more optimistic as the higher the houses sell for, the higher the commissions of their agents.
A fifth source is web portals.
This is probably the most popular as they are the easiest to get access to. However, they are also the least dependable when trying to figure out a fair market value estimate.
So amazing are these valuation engines on the internet, that sometimes all the information you need to provide in order to receive a valuation is a zip code.
They do deserve recognition as so many people are using them.
How to determine fair market value
As mentioned previously, FMV is not a figure that can be quantified with formulas as there are intangible decision-making factors involved.
A house with a moderate asking price can very well be spruced up by 20% for it’s unquantifiable aesthetic value, jacking up it’s FMV.
It is important to note that the multiple sources of value stated above are not FMV. But they are good place to start with them determining FMV.
Everyone would have an opinion on what constitutes FMV. Especially when they are emotionally attached to it.
You could very well add up the figures from all 5 sources and average them out.
It would be a fair representation of FMV. But when a transaction really takes place, FMV could still be way off due to other buying decision criteria exercised by buyers
Finally, be mindful that fair market value for a house is a reflection of a property’s current value, not the past.