The Home Owner's Corner

"Fair Market Value"

What is Fair Market Value?

Fair Market Value is defined as... The price at which buyers in the open marketplace are willing to pay for a product or service.

What does this mean to you? Well if your selling your home, A LOT!

1 Fair Market Value (FMV) is a term in both law and accounting that is based on the economics term of "market value." It is also a common basis for assessing damages to be awarded for the loss of or damage to the property, generally in a claim under tort or a contract of insurance. A fair market value is often an estimate of what a willing buyer would pay to a willing seller, both in a free market, for an asset or any piece of property. If such a transaction actually occurs, then the actual transaction price if usually the fair market value. Note that the opinion of people that are not interested in buying or selling an asset has little meaning, because they are not active in the market. Thus, "market value" (which is the same for everyone in the market) is not identical to the "intrinsic value" that different individuals may place on the same asset based on their own preferences and circumstances.

However, market transactions are often not observable for assets such as privately-held businesses and most personal and real property. Thus, FMV must be estimated. An estimate of Fair Market Value is usually subjective due to the circumstances of place, time, the existence of comparable precedents, and the evaluation principles of each involved person. Opinions on value are always based upon subjective interpretation of available information at the time of assessment. This is in contrast to an imposed value, in which a legal authority (law, tax regulation, court, etc.) sets an absolute value upon a product or a service.

So what it all boils down to is this,

The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. A fair market value sale also is known as an arm’s length transaction.

A number of factors may affect a residential property’s market value, including:

THE SALES COMPARISON APPROACH

The most common way to determine the market value of a residential property is to use the sales comparison approach. This is the primary method used by professional appraisers to determine the market value of residential properties.

To determine an estimate of a property’s market value, arm’s length comparable sales are used. By examining recent sales of at least three properties in a general (or similar) neighborhood that are comparable in building style, size and construction, one can begin to get a good understanding of a residential property’s market value. However, it is important to consider the circumstances of such sales - perhaps the seller was desperate to “unload” the home, or the buyer paid much more than the asking price because there were other interested parties. Market value and sales price are not always the same.

Comparable sales should include characteristics similar to a given property, such as lot sizes, square footage, home style, age, and location of the home. A new three-bedroom Cape Cod house may not be comparable with an older three bedroom split-level ranch, even if they are on the same street.

Since it may prove difficult to find an exact comparable sale, allowances must be made. To arrive at an estimated market value, dollar adjustments are made for differences between the property being valued (also known as the subject property) and the comparable properties that have sold.

For example, assume that a residential property is a 1,500 square feet ranch with 3-bedrooms, 1 bathroom, full basement, and two-car garage on ½ acre of land. It was built 6 years ago in a nice neighborhood. Three recent arms-length sales are identified that appear to be comparable with the subject property. However, Sale #1 is in a less desirable (or inferior) location and Sale #3 has an additional bath. Sale #2 is almost identical to the subject property.

To estimate the market value of the subject property, one needs to determine how the differences between the subject property and each comparable sale property relates to prices at which they sold.In this case: Sale #1 is in a less desirable location, which lowered the sale price; and Sale #3 has an extra bath, which increased the sale price.

A grid, such as the one above, is helpful to arrive at the market value of residential properties. Because the subject property is not in an inferior location, Sale #1 should be adjusted to reflect what it would have sold for in the subject property’s neighborhood. Sale #3 with an extra bath needs to be adjusted to the sales price of a property with only one bath. Because Sale #2 is almost identical to the subject property, no adjustments are necessary.

By adding and deducting these adjustments to the comparable sale, an adjusted sale price is arrived at for each sale.

A common mistake is to average the comparable sales prices to arrive at the market value of the subject property. This can yield widely varying results. Only the sales that are most similar to the subject property should be given the most weight.

THE ASSESSOR’S ROLE IN DETERMINING MARKET VALUE

Your assessor may use mass appraisal techniques, real estate market trends, the sales comparison, as well as other approaches to value to arrive at a property’s estimated market value, which is available on the assessment roll.

If one determines the market value of his or her property and feels that the assessor’s estimate of market value (upon which the assessment is based) is too low or too high, then the property owner should contact the assessor’s office to learn the procedures for informal assessment review. During the informal review process, the property owner and the assessor can each discuss the property’s inventory (or characteristics) and how the market value estimates were determined. If the property owner remains unsatisfied with the assessment, he or she has the right to formal administrative and judicial review of the assessment. The assessor can provide the property owner with information on these processes.

*Appraisal laws and rules change. The above is to be used as a reference and may not apply to all conditions, locations or circumstances.