How is a Home’s Fair Market Value Determined?  How is a Home’s Fair Market Value Determined?

How is a Home’s Fair Market Value Determined?

Written By: Ashley Sutphin
Monday, June 7, 2021

Theres a term in real estate thats >

We all know there are a number of variables that actually interfere with transactions, and both buyers and sellers negotiate until they can come to a price they agree on.

While negotiation is a big part of buying a home, understanding fair market value is also >

There are a few things fair market value isnt. It isnt solely what either party thinks the value of the home is, nor is it just the appraised price. Its also not the tax value. These factors can be part of the fair market value, though.

Calculating Fair Market Value

There isnt a specific fair market value formula, and homes are assets that are subject to the ups and downs of the market. Primarily, supply and demand play a role in the value of a home.

Some of the elements that can be considered when calculating fair market value are:

Current market trends
A comparative market analysis of other properties that are similar and in the same area
Having an appraiser assigning a value
Calculating the fair market value based on a price per square foot

Any one of these things can be used in conjunction with one another to start to come to a fair market value.

Figuring out the fair market value is something real estate agents are experts at, which is one of the reasons people opt to hire them rather than trying to sell their homes independently. Its important to have knowledge of the facts of the property itself but also whats happening in the local real estate market and even whats happening on a larger level in the economy.

How Is Fair Market Value Used?

Typically, once the fair market value is calculated, then thats used to determine the homes selling price, but with caveats. For example, if the homes fair market value is 250,000 based on market trends, but its in a very popular neighborhood, the asking price might go up to 300,000.

There are other ways outside of real estate that fair market value might be used, and also other applications >

For example, the property tax that you owe to your municipality is probably based on the fair market value of your home. Your FMV tends to go up the longer youve owned your home, so your property taxes go up as well.

The value of your home might also affect tax credits, your gift tax, and your estate tax.

If you were to gift your home or make it part of an inheritance, then the person youre giving it to may have to pay taxes based on the fair market value.

If that person then sells the home and they get more for it than the value it was assessed at when they inherited it, they have to pay capital gains tax on the difference between what they sold it for and the fair market value.

Fair market value is a term used in insurance as well. If your property is damaged, the amount you receive to pay to repair it can be based on fair market value.

If your home is affected by a natural disaster and its evaluated below FMV, you might not get as much compensation.

There are a lot of ways fair market value can be used, but again, its not an exact formula. Its often based on several key metrics simultaneously to figure out how much a home might be worth at any given time if it were to go on the market.

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Updated: Tuesday, June 22, 2021

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