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8 min read Jan 26, 2023

What is Fair Market Value of a House: A Complete Guide!

Fair Market Value of a House

Fair market value or FMV is the price at which a property sells on the open market. 

As of October 2022, the nation’s average median sale price was up by 5.0%, indicating a relative increase in the fair market value. 

Several factors are considered while determining the FMV. If you want to price your home right, learn what fair market value is and how it is calculated.

What Is Fair Market Value of a House?

A home’s fair market value (FMV) estimates what it would sell for on the open market. 

FMV is an estimate, not the actual value of the property. The FMV is agreed upon by a willing buyer and seller who are both reasonably knowledgeable about the property.

The fair market value of a house is based on several factors, such as current housing market trends, appraisal value, and an evaluation of comparable homes in the area. 

The fair market value of a home is easily evaluated by multiplying per square foot by the home’s square footage.

» How To Price Your Home for Sale: Learn how to price your home for sale in 6 easy steps.

Fair Market Value vs. Appraised Value 

The fair market value of your home provides an estimate of the price it would sell on the open market. It helps you determine the listing price. 

A fair market value depends upon the local market conditions of your property. 

On the other hand, the appraised value of a property is the result of an independent assessment by a licensed, third-party appraiser. 

In comparison to fair market value, the appraised value provides a more personalized, objective estimate of how much your home is worth.

» Home Appraisal Checklist: Know what exactly a home appraiser is looking for.

What Is the Purpose of Fair Market Value?

A property’s fair market value helps an individual to understand the estimated listing price, property taxes, closing costs, insurance claims, and much more.

It provides an idea of the calculated net proceeds sale of the home. 

Lawyers, government agents, and insurance companies consider fair market value outside real estate transactions in situations like divorce, death, and damage from a natural disaster.

We have explained the most important uses of fair market value in a real estate transaction.

1. Pricing a home

The FMV of a house directly influences its listing price. Sellers must avoid undervaluing their property by pricing it competitively on the market. 

The fair market value of a home may differ from the sales price at times as the open market’s supply and demand determine a home’s value.

2. Securing a Mortgage Loan

Most mortgage lenders demand a home appraisal report before granting a loan. 

With the help of a home appraisal report, a lender is prevented from promising more than the house is worth. 

If your appraiser finds a house worth less than it is listed for. Then, the buyer might only be able to get a loan if the listing price is changed to reflect the appraised value. 

3. Insurance claims

The insurance companies consider the fair market value when calculating homeowner insurance policy rates. The fair market value of a house directly affects how much the insurance provider will have to pay if the house is damaged. 

High-FMV homeowners may be required to pay higher insurance premiums but receive more money for repairs.

4. Property tax

The local taxing authorities determine the amount of property taxes a home’s owner will be required to pay. Depending on your state, assessors evaluate properties every few years. 

Your home’s fair market value fluctuates yearly due to market appreciation or depreciation. FMV is crucial in determining how much a person will pay in property taxes.

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How To Find Fair Market Value of Home?

Many variables determine the fair market value, but no specific formula exists. Each valuation comes from two major factors: real estate appraisals and historical sales data.

1. Take the Help of a Home Appraisal

A home appraisal is a professional opinion of the market value. The lender appoints a home appraiser to form an idea about the property’s value as of a specified date. 

The IRS defines guidelines on fairly evaluating a property’s value. 

The IRS publication 561 states that “each piece of real estate is unique and its valuation is complicated; a detailed appraisal by a professional appraiser is necessary.”

A home appraiser mainly evaluates the property based on these three approaches. 

» Home Appraisers Near Me: Connect with the best home appraiser near you.

A. Comparable Sales

The appraiser compares the property with similar properties recently sold in the area. After adjusting for size, condition, and location differences, the property’s fair market value is calculated.

Only comparable sales with the fewest item or overall amount adjustments should be considered when comparing them to the donated property.

B. Capitalization of Income

The capitalization of the income approach values an investment assuming future benefits. 

This method compares the value of a property to the market rent it can be expected to earn and its resale value.

C. Replacement Cost New Value Approach

The replacement cost method usually sets the upper-value limit. It is reasonable to assume that a knowledgeable buyer will only pay what it would take to construct the same.

The new value approach calculates the cost of building a property with the same utility using current building materials and following design guidelines.

2. Study the Market Dynamics

If the neighborhood’s median home prices aren’t rising significantly. Then, you must go with the average adjusted number.

If median home prices have increased significantly over the past six months, the market is extremely competitive. Then, you can increase your value proportionately to account for this.

3. Check on Real Estate Websites

Real estate websites like Zillow.com, Trulia.com, Realtor.com, and Redfin.com can quickly determine a home’s fair market value. 

Both homeowners and homebuyers can use these websites to research the estimated value of a home and compare it to other houses in the neighborhood. 

4. Check Tax Records

Homeowners and homebuyers can check online tax records that may include property information such as the last sale price, square feet, and more. 

They can get some insights related to the property’s present value. 

5. Calculate The Price From Square Footage

One of the variables considered when determining a house’s fair market value or listing price is its square footage. 

The estimated value of your home is typically determined by the cost per square foot of homes in the area multiplied by the number of square feet in your home.

Housing Market 2023 Updates

Check out your state’s housing market statistics to better predict the FMV.

RegionStates/CitiesReal Estate Housing Market 2023
NortheastStatesConnecticut Housing Market | Maine Housing Market | Massachusetts Housing Market | New Hampshire Housing Market | New Jersey Housing Market | New York Housing Market | Pennsylvania Housing Market| Rhode Island Housing Market | Vermont Housing Market
NortheastKey Cities
MidwestStatesIllinois Housing Market | Indiana Housing Market | Iowa Housing Market | Kansas Housing Market | Michigan Housing Market| Minnesota Housing Market| Missouri Housing Market | Nebraska Housing Market | North Dakota Housing Market | Ohio Housing Market | South Dakota Housing Market | Wisconsin Housing Market
MidwestKey Cities
SouthStatesAlabama Housing Market | Arkansas Housing Market | Delaware Housing Market | Florida Housing Market | Georgia Housing Market | Kentucky Housing Market | Louisiana Housing Market | Maryland Housing Market | Mississippi Housing Market | North Carolina Housing Market | Oklahoma Housing Market | South Carolina Housing Market | Tennessee Housing Market | Texas Housing Market | Virginia Housing Market | District of Columbia Housing Market | West Virginia Housing Market
SouthKey Cities
WestStatesAlaska Housing Market | Arizona Housing Market | California Housing Market | Colorado Housing Market | Hawaii Housing Market | Idaho Housing Market | Montana Housing Market | Nevada Housing Market | New Mexico Housing Market | Oregon Housing Market | Utah Housing Market | Washington Housing Market | Wyoming Housing Market
WestKey Cities

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Fair Market Value in Today’s Market

At present, the best way to calculate the fair market value is to use the comps strategy. It is usually done by taking the average of three or more comparable homes.

A real estate agent determines the FMV to make an offer or to determine the listing price.

However, this strategy will only work as effectively since home sales are slowing down, and sellers must reduce prices in response to rising mortgage rates.

To estimate fair market value, agents and appraisers often rely on the comps method and the cost or income utilization approaches. You can use either way to determine your home’s fair market value.

Frequently Asked Questions

1. What is fair market value of a house?

A home’s fair market value (FMV) estimates what it would sell for on the open market.

2. How to determine fair market value?

Many variables determine the fair market value, but no specific formula exists. Each valuation comes from two major factors: real estate appraisals and historical sales data.

3. Is fair value the same as market value

No! Fair market value is an estimate, not the actual market value of the property. The FMV is agreed upon by a willing buyer and seller who are both reasonably knowledgeable about the property.

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