Fair Market Value (FMV): What Is It and How Do You Calculate It?
All the fun memories you’ve enjoyed in your home are priceless. But the house itself will get a certain price when you sell it, often based on its fair market value (FMV). But what is fair market value? How is it determined? And how is it different from market value or appraised value?
To get you the best answers, we asked an award-winning real estate agent and a certified residential appraiser for insight. Through their expertise and our extensive research, this post will provide the answers you’ll need before you sell your home.
What is fair market value?
The official definition of fair market value used by the Internal Revenue Service states that: “Fair market value is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”
This means that there’s no pressure to buy or sell the home, and both sides have the same information about a property for making a sound financial decision.
To put it another way, fair market value doesn’t necessarily represent the value of the home. Instead, it is somewhat hypothetical. It represents the estimated amount of money a buyer and seller would likely agree upon through negotiations and under normal conditions.
When might a home not sell for fair market value?
There may be times when a home is sold above or below its fair market value. For example, if a homeowner is facing an expensive family medical emergency and can’t make their mortgage payment, or they need cash immediately to pay hospital bills, that is not a normal or typical selling condition. The homeowner might be compelled to sell the house below its fair market value.
Essentially, if either party is reacting to outside pressures — medical emergency, loss of a job, death in the family — while buying or selling a home, the home’s price point might drift away from its fair market value.
