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Fair Market Value: What Is It And How Is It Calculated?

4-Minute Read
Published on May 11, 2020
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When it comes to assessing how much your house is worth whether it’s to gain a sense of how it compares to the original purchase price or to prepare your home to be listed on the market – you should know that there are different types of values that can be assigned to your property.

If you’re selling your house, your goal is to find a buyer willing to pay your asking price. Pricing your home too high or too low may cause it to sit on the market for way too long. Calculating the fair market value of your home can help you price your property just right.

To ensure your home attracts buyers willing to pay your listing price, here’s what you need to know about fair market value and how it’s calculated.

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What Is Fair Market Value?

Fair market value, or FMV, is the price that your home or other assets would sell for under normal market conditions. When you’re selling your home, you’ll have it assessed and appraised. This is known as an assessment of worth. Your assessor will tell you what the appraised value of your home is. While the home appraisal isn’t the same thing as determining FMV, the result of an appraisal can help to determine the FMV.

In an open market, the market value typically uses the FMV to determine the selling price. Therefore, fair value is the measure of an asset’s worth, and the market value is the price it will go for in the open marketplace. For example, if the fair market price of a home is $200,000 but the home is in an up-and-coming neighborhood, the market value may be closer to $225,000 due to many people wanting to live there. In other words, the market can drive the value higher than that FMV.

What Is Fair Market Value Used For?

Although we often speak of fair market value in terms of buying and selling real estate, there are plenty of applications for it.

Real Estate

Calculating the fair market value of your home can be valuable in terms of your ability to sell your home and understand where improvements to the estimated value (those that are within your control, at least) can be made. Therefore, it’s important to understand the value of your home before you decide to sell so that you can make the appropriate improvements to your home if you want to sell it at a higher price.

Taxes

Additionally, it’s valuable to know the fair market value of your home because municipal property tax is typically based on the FMV of a property. If you have owned your home for a long time and the FMV has gone up, your taxes might be a lot higher than they were when you purchased it.

The value of your home can also impact your gift tax, estate tax, tax credit, and tax deductions after a casualty loss. For example, if you plan to gift your home or include it in an inheritance, then the person who gets your home will have to pay taxes on the fair market value of the property. If the person chooses to sell the house and gets more for it than the value at which it was assessed in the inheritance, then they will have to pay capital gains tax on the difference between the sales price and the fair market value.

Insurance

Fair market value can impact things like insurance claims made when a property is damaged. When determining your insurance cost per month, the appraisal will be used to determine the fair market value of the property. Then, the insurance company will take into account any liabilities included in the home to determine the coverage and cost of the insurance.

For example, if your home is caught in a natural disaster and it has been evaluated below fair market value, you may not receive the appropriate compensation for your belongings. Another example is if your car is evaluated below fair market value and you get hit in an accident, you will not receive adequate reparations from your insurance company.  

Investment Assets

In addition to real estate assets, knowing the fair market value of your other investments like stocks and bonds can be valuable when it comes to managing your financial life. For example, when you are looking to invest, you should understand what the value of the product is as well as the asking price on the market. For example, if you are looking at purchasing several shares of a stock at $1,000 but it has recently gone up in price and will not likely continue to increase, then the market value for that day is much higher than the fair market value, and therefore would not likely be a good purchase.

How to Calculate Fair Market Value

Several factors are taken into consideration when a homeowner or a real estate agent is calculating the fair market value of a home. There is no exact formula to determine this amount as the open, free market where a buyer and seller are operating is constantly changing. The pressure to buy or sell, the characteristics of the property, and the market around the property will all play a part in determining the fair market value.The first step to determining the fair market value is to have a reasonable knowledge of relevant facts about a property. Second is understanding the economics of a free and open market, as well as the current activity on the local real estate market. Finally, comparisons between your property and similar properties in your area based on things like age, size, updates or renovations made, and more should be taken into consideration.

The Bottom Line

While there is no exact formula to determine the fair market value, an appraiser should be able to help homeowners and people looking to sell their homes to determine the appraised value. Then, a real estate agent or tax lawyer can help you to learn more about pricing your home while taking into consideration both the market value and the fair market value.

If you want to learn more about buying and selling homes, be sure to check out the Quicken Loans ® Learning Center . There, you’ll find information about every step in the home buying process, and things to keep in mind as a homeowner.

Apply Online with Rocket Mortgage

Get approved with Rocket Mortgage® by Quicken Loans – and do it all online. You can get a real, customizable mortgage solution based on your unique financial situation.

Apply Online