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What Is Fair Market Value (FMV) And How Is It Calculated?

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Published on December 9, 2021
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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, but what exactly is fair market value?

This article will explain the meaning behind fair market value and highlight its importance in real estate and other areas.

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Fair Market Value Definition

Fair market value (FMV) is the determined value of a home and what it’ll sell for in an open market. Typically, a willing seller and willing buyer will agree on a property’s FMV, using their reasonable knowledge of the property in the transaction.

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.

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. The pressure to buy or sell, the characteristics of the property and the local real estate market  will all play a part in determining the fair market value.

Still, there are a couple ways you can calculate a property’s FMV:

  • You can determine a home’s probable FMV based on comparisons between your property and similar properties in your area based on things like age, size, updates or renovations made – also known as “comps.”
  • You can have an appraiser determine the home’s valuation. While the home appraisal isn't the same thing as determining FMV, the result of an appraisal can help to determine the FMV, as well as what mortgage lenders may allow a buyer to borrow to purchase the home.

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 can be made. Therefore, it's important to understand the value of your home before you decide to sell so that you can make any upgrades to improve the value if you want to sell it at a higher price.

What Is Fair Market Value Used For?

Taxes

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 homeowners 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. 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.

The Bottom Line

Your home’s fair market value can impact its selling price and everything from taxes to insurance claims. While there’s no exact formula for calculating FMV, you can roughly determine it through comparative market analysis and/or the appraised value.

Having trouble selling your home? The price might not be the only problem. Read some reasons why a house isn’t selling and see if there are other issues you may be overlooking.

Apply Online with Rocket Mortgage

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

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto, RocketHQ, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.