What is Fair Market Value of a House And How to Calculate It

When you’re buying or selling a home, the fair market value of your property will be one of the most significant numbers you need to know. It’s not just an estimate; it’s a critical factor determining whether your deal will go through. 

While the value of a house is largely determined by its location, multiple factors are involved in determining your home’s fair market value. It is important to note that fair market value does not mean what you paid for it. 

But what is fair market value of a house exactly, and how do you calculate it? We’re going to explain all that and more below.

Fair Market Value (FMV) Meaning in Real Estate

Fair market value, or FMV, is the selling price a property would likely sell for on the open market. It is what a willing buyer would pay and a seller would accept in an arm’s length real estate transaction. 

The value of your home may be lower than its replacement cost or even what you owe on it. This is because it’s not worth as much as other houses in your area and/or because other aspects can impact its value.

Importance of Fair Market Value

In the realtor’s industry, a fair market value FMV can be viewed as the selling price (or value) at which an asset would be sold in an open market on a particular date. This differs from its book value, which is calculated based on historical records and represents the amount you originally paid for your house. But why is it so important?

To the Willing Buyer

A property’s current fair market value is essential to the willing buyer, especially before writing a letter to the seller of a home. This will help you know if the seller is asking too much or too little for the property. 

It will also give you an idea of how much profit you may make after selling the house. The fair market value can be used to negotiate house prices with your seller on the terms and conditions of the sale.

To the Willing Seller

An investment property’s fair market value, or FMV, is vital to the willing seller because it can be used to determine how much to sell your property for. It’s also essential in determining how much in taxes and insurance premiums you will pay on the property.

If it is clear that someone has an accurate understanding of what a property’s worth. Then the buyer will not only get their money’s worth but also be able to negotiate better terms like lower rates with sellers who might want them.

Market Value Vs. Appraised Value Vs. Fair Market Value

When looking to buy or sell a home, you might hear terms like market value and fair market value. You might also hear the term appraised value in a real estate transaction. 

However, it’s essential to understand each of these terms and how they differ, so we’ll break it down for you.

Market Value

The market value is the price at which a property could be sold if exposed to the market or available for sale. Fair market value or FMV meaning is the amount of money that something would bring in a competitive and open market, where buyers and sellers have equal access to price information.

The two terms are often used interchangeably but are not quite the same. Market value is determined by an appraisal technique called comparative market analysis (CMA). 

This compares recent sales of similar properties in the same area as your home. If you want to get a CMA done. Then you’ll need to hire a real estate agent with access to multiple listing service data, which provides information on all homes currently listed on the market.

Appraised Value

The appraisal is the estimated value of your home. The independent appraiser typically considers the house’s square footage, age, and condition. 

In addition, an appraised value will include other factors that affect the price, such as location, proximity to schools and amenities, etc. An appraised price can be lower than the previous sale price if there are any issues with a property, like deferred maintenance or significant upgrades. 

If you’re planning on selling or buying a house soon. Then you should be well informed of the seller’s market tips for buyers before entering the home buying process.

6 Different Ways How to Find Fair Market Value of Home

Finding the fair market value FMV of a property can be pretty tricky. For example, let’s say you want to buy a house for $100,000 and sell it for $120,000. To calculate fair market value, we need to know the actual price.

To find this information, we need to look at similar properties in your area and analyze them based on features such as square footage, condition, location, and amenities. After that, we can get an idea of how much your property will be worth if you sell it today.

1. Hire an Experienced and Trusted Real Estate Agent

If you’re looking to purchase or sell a property not listed on the MLS or other real estate websites. Then you must hire real estate agents with reasonable knowledge to find the property’s fair market value. 

A real estate agent can access much more up-to-date data than online. Also, real estate agents can help you in assessing fair market value by providing information about recent deals in similar neighborhoods. Your real estate agent can also give insight into which areas might be experiencing appreciation trends, meaning more money for your investment property.

2. Perform a Comparative Market Analysis

Another common way how to find fair market value of home is to perform a market analysis. In other words, you must first find out how many similar homes are selling in the area. 

You also need to find out how many similar homes are selling in the neighborhood and city. This will give you an idea of whether or not your home is worth its asking price. When figuring out what a house is worth, there are four types of comparables:

• Direct Comparables: These are sold properties in the same neighborhood, the same year, and the same square footage.
• Indirect Comparables: These homes may be in a different community or city but are similar to yours based on age and quality.
• Referenced Comparable: This is a home that was listed at a specific price and failed to sell.
• Highest and Best Use: This is when you take all the comparables together to get a picture of what the market will bear for your home.

3. Perform a Home Appraisal

One way to determine your home’s accurate fair market value is to hire a professional appraiser. The independent appraiser will inspect the property for relevant facts and use comparable properties to determine its worth. 

They may also look at tax records or other factors that affect the home’s valuation, such as whether it has been recently remodeled or renovated. Once they’ve completed their inspection, they will create an official report detailing how much they believe your home is worth based on these several factors. You can then use this information of relevant facts when negotiating with buyers interested in your house.

Factors that Affect the Property Appraisal

Many factors can affect the home appraisal to determine fair market value FMV of a property. The normal market conditions of the home, its square footage, location, and age are some critical determining factors. 

Other things to consider may include whether it’s a single-family or multi family home. If you have any amenities in your home, such as a pool or spa, and what kind of neighborhood you live in (e.g., suburban vs. urban).

• Type: A single-family home is generally appraised higher than a multi family home because they’re harder to come by on the market and less common.
• Age: Older homes tend to have lower values due to depreciation over time. Whereas newer homes may see higher values due to appreciation due to inflation effects on construction costs.
• Condition: The condition of the house is a factor in determining value. A poorly maintained house will have a lower value than one that has been well-maintained with landscaping and exterior repairs.
• Location: Homes in desirable neighborhoods tend to have higher values than those in undesirable areas due to demand from buyers.
• Size: Home size in square feet is a factor in home value. Due to the construction cost, a smaller house will generally have a lower price than a larger one.
• Lot Type: The type of lot a home is built on can affect its deal. A lot with a view or access to water may have a higher value than one that does not.
• Accessibility: The accessibility of a house (including public transportation and travel time) can also affect its worth.

4. Get a Home Inspection

Suppose you are in a home buying process. In that case, you must hire an inspector to perform a home inspection to determine fair market value of a property. 

A typical inspection will evaluate the home’s current condition and determine if any significant issues may affect its fair market value. Some points that should be included in a home inspection are:

• The structural integrity of the home.
• Roof condition and age.
• Exterior paint and exterior maintenance.
• Gutters, downspouts, and drainage systems.
• The presence or absence of mold or other environmental hazards.
• Roof integrity and general condition of the house
• The house’s overall condition and systems include plumbing, electrical wiring, heating, and cooling.
• The current status of any renovations that have been completed on the property. For example, if there was an addition recently or a new siding installed.
• Any significant defects that may affect the value of your home (e.g., cracks in foundation walls).

5. FMV Through Property Taxes

Your investment property’s determined fair market value can also be estimated by its property taxes. If you know what your property taxes are, you can use that number to estimate the fair market value of your home. 

This is because the property tax rate will be based on the FMV of a property. The individual who receives your house as a gift or inheritance will have to settle a gift tax based on the FMV. Knowing this number may help determine how much money they’ll owe at tax time.

6. Cost Approach Method

The cost approach method is another way to determine fair market value of a real estate property. This method uses the replacement cost of all building materials used to construct a home, labor, and profit. 

The total cost of all materials, labor, and profit is divided by two for an average per unit selling price for each item. These individual costs are then multiplied by each number of units to get an overall fee for constructing one house from scratch.

Other Uses of a Home’s Fair Market Value

While there are many uses for the fair market value of a home, this section will cover some of the more common usefulness.

Real Estate Property Tax

A real estate’s fair market value of a house is often used to determine the value of a home for tax purposes. For example, if a home is appraised at $200,000. However, if the owner has not paid property taxes on that amount, they will be required to pay taxes based on their home’s FMV.

Insurance Claims

Similarly, the fair market value of a home can be used to determine whether or not people would buy insurance on it. In case of a natural disaster, you want to get money from your insurance company. They need to know what other people would pay for homes like yours in your neighborhood.

Legal Disputes such as Divorce

Finally, the fair market value of a home is also used in divorce proceedings. In divorce, it can be challenging to determine how to split assets, especially if there are no clear-cut instructions for how property should be divided. 

In these cases, the court may rely on the home’s fair market value as an indication of how much each party should get from their portion of their shared assets. This method is commonly used when other methods don’t work or are deemed unfair by one spouse or another.

Conclusion

Whether you’re buying or selling, the house you buy will interest other potential buyers. The home’s fair market value is vital in determining how much to offer for your dream home. 

However, it should not be the only factor. When deciding on a purchase price for a property, you must consider comparable sales of nearby homes and current market conditions. Also, consider recent appraisals by professionals who specialize in real estate.

If you’re looking for trusted real estate agents with experience in the local market, contact us at HOMES by ARDOR! We’ll be happy to answer any questions and help you start selling or buying a home.

Steph Wilkinson

In her 25-year career, Steph Wilkinson has been involved in the acquisition, marketing and sales of over $3 Billion dollars of residential real estate. A number of years ago, Steph transitioned into Brokerage Leadership for National real estate brands and tech start-ups. She has served as a Business Strategist for real estate agents and brokerages alike and is also a real estate coach and trainer. In her new role with the Iconic Team, Steph will be responsible for the growth of the team and will be working with all of our agents to increase their productivity and bottom line.