What is fair market value?

Written by: Sarah Sidlow
• Updated •4 min read
A woman seated at a table uses a laptop to look into getting her home appraised to help determine its fair market value.Image: A woman seated at a table uses a laptop to look into getting her home appraised to help determine its fair market value.

In a Nutshell

Fair market value is the price that a home is generally expected to fetch in an open market under normal conditions. Fair market value can be used as a starting point to determine how much a property is worth, and is considered in real estate transactions, legal disputes, insurance and tax assessments.
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When you’re buying a house or selling, it’s important to know how much it’s probably worth on the open market.

One way to determine that is by estimating its fair market value, or FMV. In general, the fair market value of a home, or any other property, is the price that would be supported on an open market, assuming no party is under pressure to act quickly.

You may see other terms associated with a home’s value, like market value, market price or appraised value. These terms are occasionally used interchangeably, but they can mean different things. Let’s dig into the concept of fair market value versus other pricing indicators.

What does fair market value mean?

Simply put, fair market value is the price a buyer and seller would likely agree upon under normal market conditions. That means it’s a reasonable price assuming …

  • The buyer and seller are both well informed about the property
  • Neither is under pressure to buy or sell the house quickly
  • The sale is an “arm’s length transaction,” meaning the sale isn’t a special deal for a friend or family member.

Fair market value is an estimate, not an exact amount, and is different from the actual price, or market price, someone might buy or sell a home for.

How do you calculate fair market value?

There isn’t one standard formula for estimating a property’s fair market value. However, there are a few ways to determine a house or property’s fair market value. Estimating fair market value typically involves something called a comparable market analysis, also called a comparative market analysis, “comp” or CMA.

A licensed real estate agent can conduct a comparable market analysis by looking at three or more similar properties within the same area that have sold within the past six months and taking an average of their selling prices. This will give homeowners an idea of what other sellers nearby are asking for their homes and can help them determine a reasonable price for their property.

Fair market value can also be determined in part by an appraiser conducting a home appraisal, which typically involves a similar analysis of comparable properties. An appraisal not only provides a baseline number for estimating a fair market value, but also determines how much a mortgage lender may allow a buyer to borrow to purchase the home.

Some of the things that are included in a CMA are:

  • Location
  • Lot size
  • Square footage
  • Age and condition
  • Number of bedrooms and bathrooms
  • Special features like fireplaces, garages or basements
  • The date of the sale

Is fair market value the same as appraised value?

A house’s fair market value is not the same as its appraised value. This is because the appraised value represents what one professional believes the property to be worth, given not only the sales of comparable properties, but also specifics about the house in question.

Here’s an example: A home is on the market in a neighborhood where three other houses recently sold for $300,000 each. This may lead the buying audience to generally agree that this house should also be listed at $300,000. But this house has older appliances and fixtures compared to the other houses included in the CMA. Therefore, the appraiser may determine the value of this home is less than $300,000.

When would I need to know the fair market value?

Even though FMV is just an estimated value of a property, it’s used to determine a number of important things. Here are some examples outside of real estate transactions:

Insurance

Current fair market value is considered when determining how much a homeowners insurance policy will cost. This includes the cost to replace the home in case of a disaster like a fire or flood.

Taxes

A home’s fair market value is used to determine the homeowner’s property tax each year. It also affects other taxes that involve real estate, like estate tax, gift tax and inheritance tax.

For example, if someone receives a home as a gift or in an inheritance, they’ll pay property taxes on the FMV of the home, even if they didn’t spend any money to acquire it.

Legal disputes

A property’s fair market value can also be key when it comes to various legal matters, including divorce settlements or damage claims, for example. Using fair market value is one way to establish a neutral starting point when coming to an agreement about what the property is worth.

What’s next?

The list of terms and to-dos when buying or selling a home can feel overwhelming. Ultimately, though, it’s critical to make sure you’re getting a fair price, and knowing the fair market value can help.

When you’re ready to buy your new home, make sure to shop around and compare mortgages and get all your finances in order so you give yourself the best chance for homebuying success.

About the author: Sarah Sidlow is a freelance writer and editor based near Detroit. She has a master’s degree in journalism from Georgetown University. Sarah’s work has appeared in Luxembourg’s national newspaper, Washington City Paper… Read more.