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What Should I Know About Fair Market Value?

It’s important to know your home’s fair market value even if you aren’t selling.

Fair Market Value

You might have heard the term fair market value (FMV) and wondered what it means to you as a homeowner. Is it important? What are the differences between FMV, market value, and an appraisal? First, let’s talk about the definition; FMV is the price an asset, like your home, might sell for on the open market or the price that a buyer and seller would agree to. Even if you aren’t planning to sell your property, you may need to know its FMV.

It’s not uncommon to include the fair market value of assets in tax calculations and preparation or while drafting other financial documents that involve your assets. Keep reading to understand just some of the scenarios in which knowing your FMV is helpful, or even necessary.

How Can I Determine the Fair Market Value of My Home?

Even the IRS admits that determining fair market value can be complicated. The process to determine FMV is elaborate because it considers several factors that are specific to the property. In its simplest form, fair market value is the selling price to which both a buyer and a seller would agree. That number assumes that both the buyer and seller have all the pertinent facts about the property and that neither is under pressure to accept the price.

Because it is based on what both parties consider “fair,” it may seem like a challenge to determine an accurate FMV. Below, we share a few ways you can estimate the FMV of your home.

Comparable Analysis of Nearby Home Values

One of the simpler ways to calculate the fair market value is to compare your property to home sales in your neighborhood. The FMV of your home will not be the lowest or highest selling prices but instead will be the average of them. Here’s an example: 3 homes in the neighborhood sell for $300,000, $280,000, and $320,000, respectively. Based on the average of those nearby sales, you can safely surmise that the FMV for area homes is $300,000. Of course, the condition of the home and market conditions at the time of a sale would impact the final FMV.

Market Conditions

With a housing market that is always in flux, sometimes favoring buyers and sometimes favoring sellers, you may be curious what your home would sell for today. What offer would you accept? What would a realtor suggest as a listing price? Look at nearby homes and compare the list price to the selling price. Was it higher or lower, and how recently did it go on the market? (If you’re considering selling, another helpful data point is how quickly it went under contract!)

Engaging an expert real estate agent is a good idea when it comes to many facets of the home buying and selling process; determining FMV is no exception. Their knowledge of the market can be invaluable to coming up with an accurate evaluation. A realtor will have a better understanding of market conditions and the fluctuating sell prices of area homes. Your realtor should also be able to provide some data to back up the FMV they provide.

Appraised Value

Though it’s different from fair market value, an appraisal is often an excellent starting point you can use to determine the FMV of your home. The appraisal process involves having an expert grade your home using a set of standards and regulations. It does not, however, take market conditions into account. It is a good indicator of your property’s unique value and you can add it to the market data you collected earlier. Averaging these two numbers should give you a fairly accurate FMV.

Fair, Market, and Appraised Values

By now, you should understand the difference between the fair, market, and appraised value of a home. Here’s a quick recap to make it even easier:

  • Fair Value: The best estimate of your home’s value, not necessarily based on current data
  • Market Value: The listing price of the home, taking into consideration market conditions and the selling price of other area homes
  • Appraised Value: An objective valuation of the property that accounts for upkeep and maintenance
  • Each of these valuations represents a part of Fair Market Value. By averaging all three, you’ll have a fair and accurate valuation of your property.

    When Is It Useful to Know Your FMV?

    As a homeowner, you may need to report Fair Market Value from time to time in financial situations. It’s not uncommon to list the FMV of your assets when it comes to tax filings. It may also be necessary for insurance claims, divorce settlements, and, of course, when you’re getting ready to sell your home.

    It’s also simply good practice to have a clear picture of your home’s value. In the event of an unexpected situation, you may need to know the FMV, and it pays to be prepared. If you need some expert guidance when it comes to calculating FMV, an On Q Financial Mortgage Consultant would be happy to help.

    Tax Purposes

    You may need to report the fair market value of your property on tax filings for several reasons. The most common would be for the purpose of calculating municipal property taxes. Should your home suffer a casualty loss due to the damage, destruction, or loss of property, you may want to deduct that loss on your taxes. Knowing the FMV will simplify the process.

    FMV may also come into play with other property taxes, such as a gift or estate tax, and property-related credits and deductions, especially if they involve an inheritance or a sizable donation to an individual or organization.

    Insurance Claims

    Your homeowner’s insurance provider may use the fair market value to establish your policy. The insurance company will also be likely to need the FMV after a significant loss. Losing your home to a fire or natural disaster can be traumatic enough, but having to calculate the fair market value in the midst of a crisis – or leaving it up to the insurance company – can add another layer of stress. Having your FMV up to date at all times can save you from unexpected headaches in the future.

    Ready to Sell

    Of course, the most common reason to calculate your fair market value is if you plan to sell your home. It should come as no surprise that knowing your home’s FMV can be vital to establishing the ideal listing price of your property. It will help you attract potential buyers and ensure you receive as much as possible from the sale.

    Consult your real estate agent when it’s time to determine the most effective price to list your home for. The FMV is one important factor, but your target sell price matters too. Your realtor may advise you to list your home at a higher price that gives you some room to negotiate.

    Does Fair Market Value Always Apply?

    There are some real estate transactions in which fair market value doesn’t play a role. These situations typically involve quick sales or sales under distress. Here are a few examples:

    ● Liquidation sales
    ● Distress sales
    ● Deed in lieu of foreclosure
    ● Eminent domain, in which property is taken in lieu of sale

    What’s Next?

    Understanding fair market value is one more step on the way to becoming an expert homeowner. The FMV is the price to which both a buyer and seller would willingly agree, having all of the facts and being free of any pressure to accept the price. Keeping that in mind will help if you need to determine your home’s FMV quickly.

    Your path to becoming an expert homeowner doesn’t end here. Check out the rest of our articles on homeownership to get the most out of your investment and make your dream of owning a home a reality.

    Have more questions? An On Q Mortgage Consultant can help you find options tailored to your specific needs. The best part is that our Mortgages Simplified™ journey means less stress and more ways to say yes! Connect with an On Q Financial Mortgage Consultant today, or check out our easy-to-use calculators to determine how much home you can afford.

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