Real estate has long been one of the biggest industries in the world, and it can be difficult to determine how much any given piece of property is worth.
That is why fair market value (FMV) in real estate is so important. Fair market value is an estimate of the price a buyer and seller can agree on when neither of them is under any particular pressure to make the sale.
When appraising real estate, the most important factor is determining the fair market value of the property. This involves examining both current market trends in the area, macroeconomic conditions, and the specific qualities of the property itself. Realtors and appraisers analyze what comparable properties recently sold for and compare that to the features of the current property in order to come up with a price that’s fair to both buyer and seller.
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What Is Fair Market Value (FMW) In Real Estate?
Fair market value is the price that a willing buyer would pay a willing seller for a home in an open market where there is no supply and demand.
In other words, both sides would know enough about the sale to move forward, but outside factors would not affect the price and terms of the deal.
The home’s value comes down to what buyers think it’s worth.
What Is The Purpose Of Fair Market Value (FMW)?
When working with a seller or buyer to come up with a listing or offer strategy, real estate agents usually use fair market value to figure out the price or range of prices at which a home will sell.
In an appraisal report, which is done when a home is bought with financing or when a homeowner refinances, appraisers also look at the fair market value. The appraisal report is still the most common way to find the fair market value of a home, even though the appraised value, which is the opinion of a single appraiser, is not always the same as the fair market value.
Aside from buying and selling real estate, lawyers, government officials, and insurance companies also look at fair market value in situations like divorce, death, eminent domain, and losses from natural disasters.
How To Calculate Fair Market Value (FMW)
When an agent makes a comparative market analysis (CMA) or an appraiser makes an appraisal report, fair market value is often found by taking the average of the prices of three or more similar homes that have recently sold.
For an appraisal, an appraiser looks at this group of homes and considers what’s good or bad about each one based on its features. For example, if the home being appraised was 1,500 square feet and one of the comps was 1,250 square feet, that could be a plus for the comp but a minus for the home being appraised.
There are many ways for agents and appraisers to narrow down a list of comparables. The more recent the sale, the better, these days.
Given how fast sales are going in many markets right now, looking back 180 days may show data that is too old, since prices have gone up a lot in many markets in the last six to three months.
FMW adjustments are made for things like:
- Square footage
- Garage type
- Is there a pool?
- How many bathrooms
- Is there a fireplace?
- Type of lot (privacy, proximity, view, etc)
These changes are based on a range of prices in CoreLogic’s Marshall & Swift Residential Cost Handbook that is generally accepted.
For example, depending on its size and features, a pool may be worth between $15,000 and $30,000, a third-car garage bay may be worth between $5,000 and $7,000, and a full bathroom may be worth between $5,000 and $7,000.
The handbook is used more by appraisers than by real estate agents, but agents often talk to appraisers to stay up to date on changes.
Alternative Ways To Calculate Fair Market Value (FMV)
Appraisers sometimes use something called the “cost approach” to figure out a home’s fair market value. This is especially true when the home is unique and there aren’t many similar ones to compare it to.
In the cost approach, the appraiser looks at the previous sale price of the lot and estimates how much it would cost to build a new home on the property, taking into account depreciation and taking that amount away from the value.
The income capitalization method, which is used less often, is based on how much money can be made from the home. It is usually only used for income or rental properties.
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Final Thoughts On Fair Market Value Calculation
Fair market value is usually how real estate agents figure out the price or price range at which a home will sell. It’s used to figure out how to list or sell something. Most of the time, the fair market value of a home is found by taking the average price of three or more similar homes.
The comps strategy is a common way to figure out a home’s fair market value, which is the price a buyer is willing to pay in a given market.
But in many markets today, homes are selling for more than their fair market value. This means that using comps to make an offer strategy may not work for buyers in situations where there are multiple offers.
Many sellers all over the country are raising their asking prices to see what the market will bear in this low supply/high demand market. This method doesn’t work as well when the market is slowing down and when there are more homes on the market.
Agents and appraisers often use the comps method, and sometimes the cost or income utilization approaches, to figure out the fair market value when things are more even.
Bottom Line
In conclusion, fair market value in real estate is an important concept as it sets the standard for how much a buyer and seller should agree on for a given piece of property.
By researching current market trends, macroeconomic conditions, and comparable homes in the area, you can determine an accurate fair market value for any given piece of real estate.
Frequently Asked Questions
There are many things that affect a home’s fair market value, such as:
Location
Size and usable space of a home
Age and condition
Upgrades and updates
Keep in mind that the local housing market and nearby houses that are similar to yours (called “neighborhood comps”) are also important factors in figuring out FMV, as are the neighborhood and its features:
Is there a major highway or public transportation close by?
Are there good schools in the area?
How much crime is there?
How close is it to stores and other commercial businesses?
If a buyer knows the fair market value of a home, they can figure out if the list price is too high, too low, or about right, and make an offer that is competitive. Also, it can give buyers an idea of how much their lender will lend them for the property, though this depends on the home’s appraised value in the end.
No, fair market value is an estimate of how much a property is worth. This is usually done by a real estate agent based on things like the property’s condition, location, and the market value of similar properties in the same area.
Assessed value, on the other hand, is how much a local government (through a property assessor) thinks a property is worth for tax purposes, specifically property taxes.
A property’s market value and assessed value don’t have to be the same, and a home’s assessed value doesn’t always affect its fair market value or resale value. In fact, the assessed value and the current market value are often not exactly the same.
The fair market value is how much a home will sell for on the open market, which is based on buyer demand and a comparative market analysis (CMA) of similar properties in the area.
The appraised value is the opinion of a licensed, third-party appraiser, which is used by the buyer’s lender to make sure the home is worth the loan amount. Most of the time, the appraised value is lower than the fair market value. If that happens, homebuyers can try to renegotiate the offer price based on the lower appraised value, or they can try to get a second opinion from another appraiser.
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