What Is Fair Market Value? How to Calculate the FMV of a Home

Fair market value (FMV) is the valuation of a property or asset based on the conditions of the current market. In real estate transactions, a home’s fair market value is based on a combination of factors including current market trends, appraisal value, and an assessment of comparable homes in the area. Additionally, a home’s agreed-upon market price implicitly contributes to its fair market value.

The fair market value of a home will often be decided as a valuation per square foot, then multiplied by the square footage of the home in question. It is used to figure out the listing price of a home, the home insurance fees an owner will pay, and whether a home buyer can secure a mortgage loan.

Fair market value and appraised value are estimates of a property’s value in a free market. Consumers and economic factors can influence the fair market value, and the FMV indicates a selling price. Experts estimate the appraised value of a property to determine its worth. The FMV and appraised value are not always the same.

A property’s fair market value influences a home’s listing price, property taxes, insurance claims, and more. Here is an overview of three of the most important uses of fair market value.

• Pricing a home: The fair market value of a home should directly affect its listing price. Sellers should price their homes to compete with other homes on the market while avoiding under-valuing the property so they don’t lose money on the sale. Sometimes, the fair market value of a home will differ from the sales price, as the supply and demand of the open market is what truly determines the value of a home.
• Securing a mortgage loan: Most mortgage lenders will require homebuyers to get a home appraisal to gauge its fair market value before granting them a loan. Knowing a home’s appraised value protects the lender from promising more money than the house is worth. If your appraiser finds that a home is worth less than it is listed for—potentially because of a square footage discrepancy—the buyer may not get a loan for the house unless the listing price is adjusted to affect the appraisal value.
• Insurance claims: Insurance companies incorporate the FMV of a home into their homeowner’s insurance policy quotes and rates. This directly affects the payout that the insurance company will owe in the event that the home is damaged. People who have high-FMV homes might be required to pay higher insurance premiums, but their compensation for repairs will be greater.
  
• Property tax: Homes are assessed by local tax authorities to determine how much the owner will pay in property taxes. Assessors evaluate properties every few years depending on the state you live in. From year to year, the current fair market value of your house fluctuates to reflect its appreciation or depreciation on the market. This is a key variable in determining the amount of property tax a person pays.

The fair market value is the price a buyer and seller agree upon if both have reasonable knowledge of relevant facts and there are no external factors, like a quick timeline for a sale.
For example, if a seller lists a home for $350,000, and an interested buyer offers $300,000, and the buyer and seller negotiate and agree on the purchase price of $310,000, that is the fair market value.

While there is no specific calculation for determining fair market value, there are a number of variables that contribute to it that should be considered together.

1. 1. Home appraisal: The appraised value of a home directly affects its fair market value. During a home appraisal, a licensed appraiser determines the estimated value of a property. They inspect a home by looking at factors including a home’s square footage, its condition, and comparable properties in the area. Any appraisal is subject to the opinion of a particular appraiser and should be factored in with other variables like comparative properties, location, and land surveys.
2. 2. The state of the market: Professional appraisers use a method called the “sales comparison approach” to contextualize a home’s value within the conditions of the current market. They factor the results of a comparative market analysis (or CMA) into the value of the property, which estimates a home’s market value by examining the comparable sales of similar properties, which are often called “comps.” Next, they adjust for factors like market conditions, location, and physical characteristics that differentiate the subject property from comparable properties. Regardless of the condition of your property, the state of the market will always affect your property’s valuation.
3. 3. Square footage: Square footage is one of the variables factored into setting the listing price or determining the fair market value of a house. Your home’s estimated value is typically a result of a valuation per square foot of homes in the area, which is multiplied by the amount of square feet in your house.

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

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