The fair market value (FMV) of a house is the price that a willing buyer would pay a willing seller for the property on the open market, assuming both parties are reasonably knowledgeable, acting in their own best interests, and free from undue pressure or urgency to buy or sell
. It reflects an objective estimate of the home's worth under normal market conditions.
Key Characteristics of Fair Market Value:
- Both buyer and seller have reasonable knowledge about the property.
- Both parties act voluntarily and without pressure.
- The transaction occurs in an open and competitive market.
- Both parties have a reasonable time to complete the sale
How Fair Market Value Is Determined:
There is no single formula, but FMV is commonly estimated by:
- Comparing recent sale prices of similar homes ("comps") in the same area, adjusting for differences such as size, condition, location, and features like garages, pools, or fireplaces
- Considering the home's appraisal value, which is assessed by a licensed appraiser who inspects the property and compares it to similar homes
- Factoring in current market conditions, including supply and demand, neighborhood amenities, and local real estate trends
- Calculating price per square foot based on comparable properties and multiplying by the home's square footage
Importance of Fair Market Value:
- Helps sellers set a realistic asking price.
- Assists buyers in making informed offers.
- Used by appraisers, lenders, attorneys, and insurance companies for various purposes such as mortgages, taxes, and claims
- Differs from assessed value (used for property taxes) and appraised value (a professional opinion of worth) but is related to both
In summary, the fair market value of a house is an estimated price reflecting what the property would sell for under normal conditions between knowledgeable and willing parties, primarily determined by recent comparable sales, appraisal, and market factors
