What is fair market value (FMV) in real estate and how is it calculated?

Buying or selling a home has a lot of steps involved  some of which may feel more intimidating than others. One important aspect of the journey is learning a property’s fair market value (FMV). Determining the fair market value is a nuanced process that considers multiple factors, but it can help you make an informed decision about a home’s value.

We’ll discuss what fair market value is in real estate, ways to calculate it, and where else fair market value applies. That way, you can be confident you’re buying or selling a property for the right price because you took the time to figure out home value first.

Fair market value (FMV) meaning

Fair market value (FMV) in real estate is the determined price that a property will sell for in an open market under current conditions, neither under compulsion to buy or sell. The FMV is agreed upon between a willing buyer and seller, both of whom are reasonably knowledgeable about the property in question.

The fair market value also assumes that the buyer and seller are acting in their own best interests. In other words, the seller isn’t giving the buyer a better deal on the home because they have a personal relationship.

Keep in mind that fair market value isn’t the same as a property appraisal, tax assessment, or comparable market analysis. An appraisal can influence the FMV, but FMV is generally what someone would be willing to pay for the property.

How to calculate the fair market value of a home

There isn’t a defined formula to determine the fair market value of a home. Property values increase and decrease over time, and factors such as supply and demand, individual circumstances, and a home’s features could all influence the market value.

 Fair market value reflects what the market will support at a given time, which may differ from a seller’s expectations or a buyer’s personal valuation.  – it might depend on what it’s currently worth to the buyer or seller.

With this in mind, here are the ways you can roughly calculate FMV:

• Agree on a price: A willing buyer and a willing seller can agree upon a property’s value based on their reasonable knowledge of the property and current market trends.
• Use a comp analysis: A comparative market analysis will evaluate similar properties in the area to give you a better idea of what the fair market value of the house could be.
• Get home appraised: A home appraisal can help you determine a home’s value, but it isn’t always the final determination on FMV. Often, the appraised value becomes the FMV by default, since it reinforces what a lender may allow a buyer to borrow.
• Find the price per square foot: You can also calculate a rough price per square foot by using comparable homes in your neighborhood as a reference point.

A home’s features can also increase or decrease a home’s FMV. Here are some features that can contribute to the fair market value:

• Total square footage
• Number of bedrooms
• Size of closets
• Size and type of garage
• Features such as a fireplace, a pool, and smart systems
• Total lot size and type (e.g., view and privacy)

Getting a fair market value estimate

If you’re planning to sell your home soon and want a rough estimate of its fair market value, there are several online tools and calculators to help. The Redfin home value estimator is a great option to see how much your home could be worth. You’ll need to submit your address to see the estimation. Note that the estimate could be more or less if you’ve recently renovated your home or had any damage that hasn’t been repaired. 

Fair market value FAQ

Now that we’ve covered how fair market value can be calculated, here are some frequently asked questions about FMV.

Can an appraiser tell me the fair market value of my home?

A real estate appraiser finds the appraised value of a home, which can be used if a fair market value is needed. Licensed appraisers determine a home’s valuation, which helps lenders determine how much they are going to let a potential buyer borrow on a home. Appraisers base their assessment on the property’s condition, so their value could be lower than what you could realistically get in a seller’s market. 

How can I calculate the fair market value of my home?

Buyers and sellers have a few options – agree on a number after doing independent research, perform a comp analysis, hire a real estate appraiser, or calculate the price per square foot.

What else does FMV impact?

Fair market value isn’t just important to the home buying and selling process. It can impact homeowners’ insurance claims, property taxes, and other relevant legal disputes, such as in a divorce settlement or eminent domain.

The bottom line: Fair market value helps determine property price

Understanding the fair market value of a home can help you become a better-informed buyer or seller. While FMV can fluctuate due to supply and demand or a home’s features, it can help you understand what a home could be worth and what you may be willing to buy or sell it for.

If you’re ready to buy a home, you can begin the mortgage application process with Rocket Mortgage^®.

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, or tax advice. Refinancing may increase finance charges over the life of the loan. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.