Fair market value of real estate is typically described as the highest estimated price a buyer is willing to pay for a property under normal selling conditions. Obtaining an accurate fair market value involves gathering statistical data and information from similar homes with comparable features. Many homeowners have a subjective opinion of value for their personal property, but this method helps take the guesswork and bias out of the equation, leaving a true estimate of value.
Arm's Length Transaction
The fair market value can only be established when the buyer and seller encounter an arm's length transaction. That is, the buyer and seller are acting independently of any abnormal pressures and have no relationship to each other. Additionally, information obtained in order to establish the fair market value of a property should only come from other sales that were also arm's length transactions. This helps to find a more accurate estimate of value.
There can be many reasons a homeowner may need to establish fair market value of a property. The most common reason is for pinpointing an accurate starting price when listing a home for sale. The goal is to gather enough supporting market information to establish the highest amount a potential buyer might be willing to pay. Other reasons to obtain fair market value can include making an offer on a home, refinancing, providing local tax assessments or establishing value in a divorce or estate sale situation.
Comparative Market Analysis
Both real estate agents and appraisers determine fair market value by a method called "comparative market analysis," although an appraiser is generally more thorough. This is accomplished by gathering information on similar properties that have recently sold near the subject property. Factors such as size, age, style and condition are considered when finding similar properties to compare. Reviewing the traits, characteristics and sold price of similar properties leads to an accurate estimate of value.
While the estimated price and supporting data can seem convincing, the actual true value of a home or property is only provable when a buyer closes on the property. This sold price shows what a buyer was truly willing to pay, and information obtained can be used in future comparative analyses. In this way, market data is gathered to determine the fair market value of other properties by real estate professionals.
Meribeth Phipps has been a real estate broker since 2000, specializing in residential new home sales. She holds a bachelor's degree in business and marketing.