Hommati Logo

Download the App

Property Prices: What is Fair Market Value?

Go back
Property Prices: What is Fair Market Value?


Are you looking to sell your home soon? Are you curious about what your home is worth? Have you considered the value of the homes in your area?

If so, you need to learn about fair market value.

The fair market value of your home tells you a lot about how to go about pricing a home. If you are selling it (or just curious), you need to use the fair market value.

To learn more about property valuation and calculating home prices, keep reading.

Understanding Fair Market Value

Fair market value (FMV) is the price that accurately depicts your home's value. In theory, it is also the price that an arm's length buyer would pay in the open market for your home.

While fair market value is not equivalent to the appraisal value, both of these numbers should be close. 

The appraised value comes from a licensed appraiser who combines their inspection of the home with other adjustments. On the other hand, fair market value is a less accurate assessment that uses comparable properties alongside basic market understandings.

How Fair Market Value Works

The fair market value is the amount of money that educated, willing buyers and sellers could agree on for the property in question. In this hypothetical scenario, both the buyer and seller are acting in their individual best interest.

The idea is that the buyer wants the property as much as the seller wants to get rid of it. If neither party is pressured by outside sources and each party is honest about the home's condition and their needs, they should come to an agreement around the fair market value.

Of course, this does not happen perfectly every time. There are too many factors to take into consideration.

Some buyers want homes so badly that they will pay a little more. Some sellers want to get rid of homes so badly that they will take a little less.

What Determines the Fair Market Value

A fair market value estimate can be based on two things:

  1. Precedent
  2. Extrapolation

The first, precedent, looks at the past home values. The second, extrapolation, assumes that the current trends will continue in the future.

Looking at both of these considerations may be the best way to determine fair market value when pricing a home. If you consider both estimates, you may be able to get a more accurate property valuation. 

Who Determines the Fair Market Value

The fair market value of a property is subjective. The value that you get will depend on who is conducting the calculations. 

It also depends on the information that the calculator has available. If there is hidden information, the fair market value cannot possibly be accurate.

When it comes to absolute home value, a legal authority must make this assessment. Usually, this home value exists for the purpose of calculating property taxes.

Calculating Fair Market Value

In order to get the right selling price for your home, you need to calculate the fair market value of the home. Luckily, there are several ways that you can do that.

1. Consider the Local Market

First, you have to look at your home objectively through the lens of the market around it. When you are thinking about your home, you become subjective because of your nostalgia.

You have to think like a buyer who is looking at your home. Here are some of the features that a buyer could be looking for:

  • The square footage of the home
  • The number of rooms that the home has
  • The number of bathrooms that the home has
  • The number of additions to the home
  • The neighborhood that the home is in
  • The closeness of the home to schools, hospitals, shopping centers, and other places
  • Accessibility for disabled and elderly family members
  • The safety of the areas around the home
  • The integrity of the home itself
  • The curb appeal/exterior look of the home

As you are looking at these characteristics, you need to consider the negative traits of your home as well. Do not get jaded by your love for your home.

We are sure there are plenty of great things that your home has to offer, but there are also some things that you should consider weaknesses.

2. Estimate the Value Online

Just like any other information, you can find out a lot about your home value using an online value estimator. These online tools use a variety of available information about your home and the area around it:

  • The type of home
  • The year the home was built
  • The number of rooms the home has
  • The number of bathrooms the home has
  • The total square footage of the home and the lot it sits on
  • The number of parking spots that the home has
  • The history of the selling price for the property

While these online home value estimators are not 100% accurate, they are relatively reliable depending on the information that is available online. 

The information that you can gather about your home from these calculators can give you a great idea when it comes to pricing a home. In other words, these calculators are a starting point when it comes to property valuation.

3. Look at a Local Auditor's Website

If you are interested in viewing the assessed value of your home, your local auditor's website is one of the best places to go.

County and municipal auditors look at the value of residential properties in their respective districts so that they can calculate property taxes accurately. And, all of this information is available online.

By collecting and analyzing this information, you can understand more about your home's value. Then, you can compare that value to other homes in your area.

However, you should keep in mind that this is only an estimate for tax purposes. This estimate does not take some important market factors into account.

4. Use the FHFA House Price Index Calculator

The Federal Housing Finance Agency's House Price Index Calculator can help you look at property prices in your area. It looks at the numbers over a period of time so that you have historical information about the area that your home is in.

It can also help you predict what your home (and other homes in the area) may be worth based on the average appreciation and depreciation rates in your area.

Unfortunately, this calculator cannot estimate the market value of your home independently. But, it can help you get insight into potential home prices through the historical mortgage information.

Through this tool, you will also be able to learn more about the local market. So, you can gain information about the affordability of your neighborhood. 

5. Hire a Professional Appraiser

If you do not want to calculate your home's price alone, you can hire a licensed expert. You will save time and likely get a more accurate home value.

If you are looking to sell your home, it may be worth the extra money to get a more accurate fair market value for your home. This can help you figure out how much you should sell your home for.

With this information, you will be able to post the right home value on selling sites when the time comes.

Why the Fair Market Value Matters

If you do not have a general idea of your home's value, you may oversell or undersell your property. If you oversell, your home is not likely to get off of the market. If you undersell, you are not going to make the money that you deserve on the home.

The best way to prevent either of these scenarios is by getting an accurate home value via the fair market value.

Plus, you can use the fair market value when you are making important home decisions. It can help you when it comes to home insurance, taxes, refinancing, mortgage insurance, and more.

Where Else Fair Market Value Applies

The fair market value applies to more than pricing real estate. 

Homeowner's insurance companies take the fair market value into account when determining how much they should charge for a policy. The fair market value can tell them how much the home would cost to replace.

Keep in mind that the replacement cost of your home may not be equivalent to the amount that you paid for it.

The fair market value is also used to calculate property taxes. The fair market value times the property tax rate in your area tells you how much you would owe in property taxes each year.

Lastly, fair market values are used for legal disputes. If two people are disputing a property, the fair market value can help determine the division of assets between parties.

Using Property Valuation to Determine Selling Price

As you can see, the fair market value of your home is important. Whether you are selling soon or not, the fair market value can tell you a lot about your home.

However, if you are thinking about selling soon, you must know the fair market value of your property.

For help in your home sale, hire a professional licensed realtor. One of these experts can help you navigate your home's fair market value and what you should sell your home for.