- Financial Term Glossary
- Fair Market Value
Fair Market Value
Fair market value summary:
Fair market value is a reflection of transaction value under normal market conditions.
Fair market value typically comes into play for real estate transactions, including buying or selling a home.
Factors that impact FMV include inventory, home condition, and sales of comparable homes in the same area.
Fair market value definition and meaning
Fair market value, or FMV, is the price an asset would sell for on the open market, a value the buyer and seller agree on. To establish FMV, both the buyer and seller must have reasonable knowledge of relevant facts.
For example, when a potential home buyer learns through an inspection that the basement leaks, they can choose to make an offer based on what they believe is fair. The seller can accept or reject the offer, depending on what they believe to be fair.
The fair market value of your home and the amount of home equity you have influence how much you could borrow with a home equity loan or HELOC.
Key concept:
FMV is the price a home or other asset would sell for on the open market, based on a value agreed upon by the buyer and seller.
More about fair market value
FMV represents a fair transaction value under normal market conditions. While FMV often refers to real estate transactions, such as insurance claims, tax assessments, and legal disputes, FMV can apply to any sale. For example, a car or piece of art has a fair market value.
Fair market value: a comprehensive breakdown
Various factors can influence FMV, including:
Inventory. The limited number of homes for sale compared to the number of families who want to buy is a good example of demand exceeding supply. Multiple buyers compete for the same properties, and in many cases, buyers offer more money than the seller originally asked for. If people are willing to pay more for something today than they were willing to pay last year, that means the FMV has gone up.
Comparable sales. Real estate values are often based partly on the prices of similar homes in the area. Rising home prices can impact FMV for the entire area. The same is true when values fall.
Condition of the asset. Even in a hot market, the condition of an asset matters. For example, buyers walking into a poorly maintained home automatically begin to calculate how much repairs and upgrades will cost. These expenses could be subtracted from the amount a buyer is willing to pay, lowering their opinion of the home’s FMV.
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