Understanding Fair Market Value of a Home

A home’s fair market value is the estimated price the home would sell. It’s the price that both the buyer and seller would agree upon in a normal market. It uses all impartial methods when determining the value – in other words, the seller or buyer’s input isn’t used when determining the FMV.

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How to Come up With a Home’s Fair Market Value

Typically, a professional appraiser determines the fair market value of a home. The appraiser does so is with the comparative market analysis. Granted, any real estate professional (or even yourself) can use this method, but it’s most effective with an appraiser.

The comparative market analysis uses other properties like the subject property that recently sold. In an ideal world, the appraiser would use:

  • Homes that sold within the last six months
  • Homes that are within one mile of the subject home
  • Homes that have the exact same features as the subject property

The appraiser or real estate agent uses the most recent sales prices for these homes to come up with a value for your home. Of course, since it’s impossible to find homes with the same exact features, the appraiser may make some adjustments. For example, if the closest comparable sale is 500 square feet bigger than your home, the appraiser would adjust your home’s value accordingly (down).

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How to Use a Home’s Fair Market Value

The fair market value comes into play in many circumstances, with the most obvious when you buy or sell a home. Everyone wants to make sure the price paid is fair for the current market.

Other uses for FMV include:

  • Assessment for property taxes
  • Insurance claims
  • Home financing (buying or refinancing)
  • Wills and trusts (inherited property)
  • Short sale

Fair market value can be a bit subjective. Even though appraisers use comparable sales in the area, sometimes a few adjustments must be made. Sometimes, everyone doesn’t agree on the comparable property choices either.

In a perfect world, the fair market value would be agreed upon across the board. It would be easy to find comparable sales that are an exact duplicate of the subject property. Because we don’t live in a perfect world, though, we have to rely on the expertise of the professional appraisers and real estate agents to come up with the right fair market value for a home.

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JMcHood

Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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