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What is Fair Market Value in real estate, and how is it calculated?

04 NOV 2021 • By zmtorrazo • 5 min read • Hotspots

What is Fair Market Value (FMV) in real estate, and how is it calculated?

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Whether you’re preparing to list your property on the market or are purchasing your first real estate investment, it’s important to understand the role fair market value (FMV) plays in owning real estate.

Let’s take a look at what fair market value is, how it’s calculated, and what it’s used for.

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What is Fair Market Value? 

Fair market value (FMV) is a term that has several meanings in the financial world. Generally, fair market value refers to the price that an asset (e.g. car, property) would sell for on the open market. 

To determine the FMV of an asset, both prospective buyers and sellers must be knowledgeable of the asset in question, are acting in their own interests, are not unduly being pressured to trade, and have a reasonable period of time to complete the transaction.

Typically, fair market value is used in real estate. However, it is also used in salary negotiations, business sales, and many other transactions, all of which hinge on having a price that seems reasonable to all the concerned parties. 

How do you determine the Fair Market Value of a property?

Unlike other aspects of buying and selling real estate, there isn’t a defined formula for determining or calculating the fair market value of a property. 

Because properties are typically sold on the open market, the value of these financial assets is subject to the fluctuations of the real estate market. Particularly, the sale price of a property is affected by supply and demand. 

For that reason, several factors, including the buyer and seller’s individual circumstances, as well as their respective desire or compulsion to buy and sell, are also taken into account when a vendor or a real estate agent is calculating the fair market value of a property.  

This is why “fair market value” isn’t always what a property is actually worth – it may depend upon what it is worth to either the buyer or seller.

With this in mind, here are ways to determine the fair market value of a property: 

  • Expert opinion. To help calculate the fair market value of a property, prospective buyers or sellers may choose to have an appraisal or valuation conducted on the property in question.

1. Property appraisal. A property is usually conducted by a real estate agent. While it is not the final word on FMV, the appraised value can often be considered sufficient by involved parties in the event a fair market value is needed for negotiations. 

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2. Property valuation. A property valuation is usually performed by a Certified Practicing Valuer for an agreed fee. They will inspect the property, carry out research and analysis into the local market and provide a detailed report regarding issues affecting the current market value of the property.

Typically, a property valuation service is required by a lender or financial institution before approving a home loan. It is also used by buyers and sellers wanting an independent opinion prior to pre-purchase or pre-sale, family or partnership settlement, capital gains tax, and in some cases, building insurance.

  • Comparative market analysis of other, similar properties in the area. When a real estate agent presents a prospective home seller with a list of recent sales prices for similar nearby homes, known as comparables, this is a way of determining fair market value.
  • Using an AMV. If you want to know the fair market value of your property without enlisting the help of third parties, you may choose to use an Automated Valuation Model (AMV). An AVM is a program that uses algorithms to sort through an online database of comparable properties that are for sale or have been sold recently. But while AVMs can give you a general idea of your property’s potential value, it’s important to note that there are many inconsistencies and inaccuracies to the program. The quality of the suburb/neighbourhood, including any unfavourable features, the interior or exterior condition of the property, and the appearance of the property are not factored in. Additionally, most free AVMs wouldn’t hold up as a fair market valuation. However, there are paid AVMs you can use that provide a more accurate FMV, such as CoreLogic’s AVM model. 

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