What Is Fair Market Value in Real Estate?

A Guide to Calculating and Using FMV Estimates

Fair market value (FMV) is an important concept to understand when you own a home or are shopping for one. If you're not familiar with FMV, learning more about it can help you better understand what your home—or prospective home—is worth. Learn what FMV means, how it's calculated, and why it matters.

What Does Fair Market Value Mean?

FMV is an estimated value used to set a sale price for assets and high-value items, such as homes. It's potentially different from the price a homeowner might be willing to sell a house or the price a buyer might be willing to pay.

It's also important to distinguish it from market value. FMV and market value are not the same thing, even though the terms are often used interchangeably. Market value is driven by supply and demand, while fair market value depends on some other key components, including:

• Willing buyer and willing seller: Neither the buyer nor the seller can be forced into the transaction. They both have to be willing to make it.
• Informed parties: The buyer and seller must be informed and have all relevant facts about the property.
• Open-market sale: The transaction must be made on the open market, not between family members.

FMV informs the pricing strategy that an agent and a seller use when putting a house on the market. It also may be used to determine property taxes, some legal matters, and lending eligibility. The current market and the house's location, condition, and size all contribute to the FMV.

How Is the Fair Market Value of a Home Calculated?

Professionals consider factors like the home's size, its age and condition, property size, and the neighborhood where it's located to make FMV estimates. There is no single formula to calculate a home's FMV. Here are four ways to find it:

• Real estate sites online: One quick way to start finding the fair market value of a home is to check online real estate sites. Both homeowners and homebuyers can use these sites to research the estimated value of a home and compare it to other houses in the neighborhood. But be careful about online values not always aligning with actual current values.
• Comparable market analysis (CMA): Real estate agents often run these reports for homeowners considering listing their house for sale. A CMA will show properties in the area similar to your home. You'll see a range of what other homes are worth and get a better idea of what the asking price of your home should be.
• Get an appraisal: It typically costs between $300 and $500 for a home appraisal. An appraiser will go through the home to determine the interior and exterior condition to come up with what they think it is worth. Appraisals are a common contingency in most home sales because lenders usually require them before approving a mortgage for a customer to buy a house.
• Check the taxes: Homeowners can get a copy of the tax assessment, which can give insight into the home's current assessed value. Many communities list this information online, typically on the local county tax assessor's website. Both homeowners and homebuyers can use these sources. Online tax records may also include property information, such as the last sale price, square footage, and more.

Note that a house's fair market value can go up or down, depending on the economy and local housing market. Be sure to evaluate a property's value as close as possible to the point when you want to buy, sell, or refinance a home to ensure the FMV is accurate.

What Factors Affect a Home's Fair Market Value?

A home's fair market value can change depending on many different factors, some of which you can control. Others depend largely on market conditions and the home's age and build.

Fair Market Value Factors You Can Control

Homeowners can control some factors that will affect fair market value. In fact, real estate professionals recommend addressing them before putting your house on the market, and appraisers consider these features when estimating its current value. These features include:

• Age and condition: The condition of the roof, foundation, walls, windows, doors, and appliances, as well as heating and cooling, electrical, and plumbing systems, can all influence a home's value. For example, replacing the roof and getting a new HVAC system will boost value.
• Improvements and amenities: Updated kitchens and bathrooms, a media room, a home office, a pool, and other amenities affect a home's value.
• Presentation: Cleaning and organizing your home shows it was well cared for, and professional staging shows potential buyers the possibilities. Additionally, curb appeal—cleaning up outside and doing some landscaping—can make a big difference.

A real estate agent may have other ideas to help boost fair market value, too. They'll have familiarity with the area, recent selling prices of similar homes, and insights into what buyers are looking for.

Fair Market Value Factors You Can't Control

Some factors are beyond a homeowner's control when it comes to influencing FMV. These are often market conditions and the home's construction, including:

• Square footage: The size of the home and the number of bedrooms and bathrooms influence the FMV. Appraisers may also consider garages, basements, and more.
• Lot size and location: The size of the house's lot and where it is located both affect its value. Appraisers may also consider the quality of the landscaping.
• Sale prices of similar homes: Appraisers like to look at the recent sale prices of similar homes in the same (or very close by) neighborhood. These are often called real estate comparables.
• Neighborhood trends: Neighborhood and community traits like school ratings, safety, zoning, and the overall upkeep may also influence the value of homes in the area.

Fair Market Value and Buying a Home

When you're shopping for a home, it's helpful to understand the fair market value of the home you're interested in buying. Comparing the fair market value and sale price of similar homes in the community can be helpful, too. That's because understanding a home's FMV can help you determine whether the list price is high, low, or about right. It can also help you make a successful offer when you're ready to buy. Plus, you'll know whether you're getting a fair price on the home.

Fair Market Value and Refinancing

The fair market value of your home can also help you determine how much home equity you have. Your home equity is calculated as the current fair market value of your home, minus your current mortgage balance. Here is an example:

$350,000 (current FMV) - $200,000 (current mortgage balance) = $150,000 (estimated home equity)

A substantial amount of home equity might allow you to refinance your mortgage for more than you currently owe, and get the difference in cash, with a cash out refinance. Typically, you can only borrow a portion of your home's equity (based on the type of mortgage you choose).

Fair Market Value FAQs

People often have similar questions about fair market value. Here are the answers to some of the top questions you may have.

Can I Determine FMV Without an Appraiser?

Yes, there are tools outside of an appraisal that can help you estimate your home's value, such as looking online, talking with a realtor, and comparing your property to others in the area. However, an appraisal performed by a state-licensed and certified professional is the most accurate way to get a home's FMV.

Does a High FMV Mean My Property Taxes Will Go Up?

Your property taxes may go up to align with a new FMV when you buy a home that has increased in value since the buyer bought it. This is because your assessed value is also going up to match the sale price. However, if your FMV goes up without a sale, your taxes could rise slightly, but will still be based on the amount you paid for your house. Taxes can also slightly decrease if FMV drops and your local assessor agrees with the value drop.

How Often Does Fair Market Value Change?

Real estate FMV changes frequently alongside factors like interest rates, supply and demand, and nearby infrastructure. However, it takes longer to change for official uses, such as tax assessments.

Final Thoughts: Fair Market Value of a Home

FMV helps sellers and listing agents price a home for the current market, and it can affect property taxes. It's important for sellers to know a true FMV, but maybe even more so for buyers. It'll help buyers understand the true value of a home and see if it's within their budget. To get a better idea of your homebuying budget and see if you can save money with today's fair market values, get prequalified today.