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The Fairness of Fair Market Value

The Fair Market Value of an asset can be the most crucial determinant in a business transaction, especially if you're buying or selling a business. The fairness of this value can be the basis for a legal dispute. So it's essential to examine the factors that determine it, so you know what factors contribute to the result and which ones will influence the outcome.

However, the concept of fair market value can be challenging to interpret, especially when it comes to real estate. If you're buying or selling property, it can be an essential factor in your decision-making. The following breakdown will help you understand everything you need to know about the fairness of fair market value. So keep reading to find out more.

What Exactly is Fair Market Value?

Fair market value (FMV) is a property’s worth as defined by current market conditions. FMV is an objective measure, not subject to personal opinion or preference. The term has a precise definition in law, which we’ll get into later. But for our purposes, think of it as the price you could expect to pay for something if you bought it from a seller who doesn’t know you and isn’t obligated to sell it to you.

The concept of fair market value comes up when you’re talking about something that can be bought and sold, usually a piece of property. You can either sell your home for what it’s worth—or for what someone is willing to pay for it. In real estate, FMV (also called fair market price or fair cash value) is an estimate of a property's current market value, usually based on a recent sale price.

Understanding fair market value is key to understanding how real estate appraisals are conducted. When you approach a lender or real estate agent about appraising your home, they will likely ask for an idea of what you think it's worth and then proceed from there. But understand that when we say fair market value, we mean what your home would sell for in a free and open market under normal conditions.

Double exposure of city with row of coin stack with growth chart

When Fair Market Value Isn’t Fair

Sometimes the real estate market can get soft and mushy, making a potential seller feel like the fair market value isn't fair at all. In this case, you might be asking questions like, "Why doesn't your home sell? Why can't you get your asking price? Are the current prices fair?

Well, don't let that mentality of "fair" confuse you in the real estate market. You might be confusing "fair" with "impartial." Keep in mind that the term fair market value sounds promising, but it isn't a warm, friendly benefactor. The fair market value doesn't care about any of the following:

  • The amount you need because you overpaid for your house when you bought it.
  • The amount you need to recover the money you spent fixing up your house after you bought it
  • The amount you need to pay off your outstanding loan
  • The cash you need from the sale to buy your next humble abode.

Median Home Prices vs. Fair Market Value

The median home price, or midpoint of a range of home prices in a given area, is calculated by totaling all existing homes and dividing them into one group with prices less than $X and another group with costs greater than $X. The halfway point between these two groups is considered a median price.

It's an oft-cited statistic because it gives us a good idea of how much people are paying to live in a particular region. While it isn't foolproof, it should give you a pretty good sense of what fair market value should look like in most areas. Learn more about home prices here!

Determining Fair Market Value

Determining FMV is not simple. Your property may have been valued at a specific price in an appraisal two years ago, but that doesn’t mean its value hasn’t changed since then. The first way to truly determine a home’s fair market value is to put it on the market and let buyers make an offer. Another way is by looking at homes that have recently sold in your area or similar neighborhoods.

Real estate agents rely on a formula called comparable market analysis (CMA) to determine fair market values. CMAs are one of their secret weapons, helping you identify exactly how much buyers will pay for a given property and predicting how much you can sell it for in a competitive marketplace. Calculating FMV isn’t rocket science—real estate professionals do it regularly. So if you want to get top dollar when selling your own home, you need to know how to do Comparable Market Analysis.

Bottom Line

If you need to make an educated decision about buying or selling any real estate, you must understand what fair market value means and how it affects the price of your property. While many people assume that fair market value will mean the same thing every time, this isn't always the case. This is especially when you factor in the possibility of significant external events, such as changes in local laws or large-scale disasters, which have enormous impacts on property values.

Interested in learning about becoming a resident in Florida or moving there? Read more.

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