Home Buying and Selling:
Determining Real Estate Fair Market Value
Buy or sell a home and you will hear the expression "fair market value." Just what is fair market value anyway? How is it determined, and when is it important?
In real estate, fair market value is the price a buyer will pay and a seller will accept for a property under reasonable and ordinary conditions. This definition assumes that neither the buyer nor seller is under any pressure to complete the transaction. When under pressure, such as the need to immediately relocate, either the buyer or seller may entertain a price that differs substantially from what would be considered otherwise. There are many other life situations that can exert pressure on one or both parties; and when they do, the price mutually agreed to may or may not reflect true fair market value.
There are of course other factors that impact the price that a home will bring. And unlike life pressures on the buyer and seller, these factors go into the determination of fair market value. Factors that come into play when arriving at fair market value include the status of the local real estate market and the location, age, and current condition of the property. Because these factors change, fair market value for a given property is not static.
When is fair market value important in real estate? Generally speaking, anytime property ownership is being transferred is a time when knowing the fair market value is beneficial. These times include those when:
- A home is being priced for sale
- Property is involved in a settlement such a divorce
- The home is tied up in an estate
- Eminent domain is being exercised by the government
How is fair market value determined? Two effective and popular ways for estimating fair market value are a comparative market analysis (CMA) and a real estate appraisal.
- Comparative market analysis -- Real estate professionals usually prepare a CMA as part of the process for determining the asking price for a home. This analysis compares the home for sale with comparable properties that have recently sold in the area as well as with other similar properties that are currently for sale.
- Appraisal -- This process is a thorough and detailed assessment performed by an independent professional appraiser. It involves a physical inspection of the property that is being appraised, as well as verification of property data through public records, an analysis of general market data, and the application of a valuation approach that is carried out according to professional practice guidelines. The result is an impartial opinion of a property's value.
As you can see, fair market value is impartial. It is not necessarily what either the buyer or the seller wants it to be based on need. For instance, no matter how much money a seller needs to pay off the loan, to recoup what may have been spent on upgrades, or to invest in a bigger and better new home, the fair market value may not support the desired amount. And for buyers, their need for a lower price because that is all they can afford does not change the fair market value a property has. It is what it is no matter how much buyers or sellers wish it otherwise.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.