What Is Fair Market Value (FMV) of a Home?

Written by Elijah BishopUpdated: 12th Jan 2022
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Whether you’re selling or buying a home for the first time, one fact is consistent. You want to ensure that the home is rightly priced to avoid losing money or chasing potential buyers. One way to ensure that a home is reasonably priced is finding its Fair Market Value. Fair market value establishes a baseline for a home buyer. And for homeowners, fair market value reveals how much they may anticipate getting for their home.

But determining the fair market value of any real estate is no walk in the park. It involves several processes and factors to arrive at one. If you’re a first-time homebuyer or seller, then this article is for you. Read on to learn what fair market value is and how to determine it. 

What Does Fair Market Value (FMV) of a House Mean? 

Fair market value or FMV is the price at which a property is listed on the market. But there are some conditions. After all, a little suburban property could be sold for millions of dollars if you could decide the price. Fair market value is more. Firstly, the following must be true:

  • The buyer and seller must be fully aware of the property’s flaw.
  • Both parties are acting in good faith.
  • No one is under undue pressure or manipulated (i.e., you need to sell your home immediately, or your buyer is in a rush to purchase the home)
  • The sale has a mutually agreed-upon date.

If all other conditions are met, this price will be the fair market value. More importantly, fair market value is not the price at which a seller or a buyer is willing to sell or buy a home.

How to Calculate Fair Market Value of a Home 

When determining a home’s fair market value, a homeowner or real estate agent considers several aspects. The urgency to buy or sell, the property’s features, and the local real estate market will influence the fair market value.

There are a few techniques to calculate a property’s FMV:

  • The probable FMV of a home is calculated by comparing it to similar properties in the region identical in age, size, and updates or renovations. In real estate terms, this process is referred to as comparative market analysis, which uses the above comp data. 
  • You can hire an appraiser to value your home. An appraisal’s outcome can help determine the FMV and how much a buyer can borrow to acquire a home. Remember that the appraised value of a home is quite different from its fair market value. 
  • The state of the market. The market’s overall supply and demand will also affect your home’s worth. Values will fall if there are too many homes for sale. In strong demand, values might rise beyond the normal. 
  • Calculate the average value per square foot by dividing the average sale price by the average square footage. Multiply this sum by the square footage of your home to get an accurate estimate of its market value.

Calculating the fair market value of your home might help you sell it faster and see where improvements can be made. So, before you decide to sell, learn the value of your home so you can make improvements to increase its value if you want to sell it for more.

Fair Market Value vs. Appraised Value 

Both appraised and fair market values attempt to determine a property’s worth in a free market. The value is based on an expert’s opinion, usually a licensed appraiser, in terms of the appraised value. But for fair market value, the buyers determine the value on what they feel a property should sell for or what they are willing to pay for it. While the appraised valueand the fair market value are expected to be equal, this isn’t always the case in reality. 

While FMV considers market considerations like supply and demand, appraised values do not. Appraisals also examine a home’s features and condition and recent sales of similar homes in the region. This means that while the FMV of a home is more sensitive to market and economic fluctuations, appraised values are more stable.

Assessed Value vs. Fair Market Value 

After becoming a homeowner, you may discover that your property has two unique “values”: a fair market value, which reflects the current price a buyer would pay for your property, and an assessed value, which is solely used to calculate key expenses like property tax. In certain conditions, the assessed value of your home may differ significantly from the home fair market value.

The fair market value of a home considers both the property’s features and the history of similar sales in the region. A property’s assessed value is usually a fraction of its fair market value. For example, some counties impose a 40% fixed assessment on residential buildings. If you plan to sell your home, the fair market value will be more beneficial to you than the assessed value. 

More importantly, the county assessor establishes assessed value for tax purposes. While a buyer establishes the fair market value of a home-based on what they would pay for your home.

How Do I Find My Home’s Fair Market Value? 

Professionals base their estimations on the home’s size, age, condition, and location. Calculating a home’s FMV is not an easy walk in the park. Here is how to find your home’s fair market value: 

  • Visit Zillow or Trulia. Checking online real estate sites can help you quickly determine your home’s market value. These sites allow both homeowners and homebuyers to investigate their estimated value and compare it to comparable homes in the area.
  • Ask your local Realtor to run a Comparative Market Analysis (CMA). This report is frequently requested by homeowners looking to sell their homes. A CMA will show nearby homes with similar attributes. It will also help you examine a range of other homes’ values and get a better notion of your own.
  • Consider a Home Appraisal. A house appraisal costs typically $300-400. An appraiser will inspect the home’s inside and exterior to establish its value. Most home sales include appraisals because lenders require them before approving a mortgage.
  • Examine taxes. Get a copy of the tax assessment to see the value of your home. The county tax assessor’s website usually has this information. Interested parties (both home buyers and home sellers) can use these resources. Online tax records may also disclose a home’s last sale price, square footage, and more.

The fair market value of a home fluctuates with the local economy and housing market. To ensure the FMV is as precise as possible, it is best to analyze a property’s worth close to the time of purchase, sale, or refinance.

Home Fair Market Value and Refinancing 

The fair market value of your home might also help you calculate equity. Your home’s current fair market value minus your current mortgagebalance equals your equity. As an example:

Current Fair Market Value of Your Home$400,000
Current Mortgage Balance$250,000
Estimated Home Equity$150,000

Your home fair market value will determine your loan-to-value when looking to refinance your mortgage. Similarly, your LTV influences the amount you can get through a cash-out refinance.

The higher your home appraised or fair market value, the higher the amount of equity you can cash out from your home. That is because the higher your home value over your lender’s loan, the lower your LTV ratio.

Is Fair Market Value the Same as Purchase Price? 

The fair market value is the same as the property’s purchase price. Like we mentioned in the above sections, fair market value is the estimated price at which a property will sell on the open market. The FMV is agreed upon by a willing buyer and seller familiar with the property. 

Bottom Line: What Is Fair Market Value of a Home? 

The fair market value of your home affects everything from taxes to insurance claims. While there is no specific formula for calculating FMV, it can be estimated using CMA or assessed value. Before buying or selling real estate, you must appraise your home to determine its fair market value to avoid selling for less or paying more than a home’s worth. 

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.