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

A home is one of the most expensive purchases people make in their lifetime. As such, buyers, sellers and investors alike are all very concerned with getting an accurate fair market value of a property. But determining the fair market value is a nuanced process that takes multiple factors into consideration.

We’ll discuss what fair market value is, how it can be calculated and where else fair market value applies.

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. The FMV is agreed upon between a willing buyer and seller, both of whom are reasonably knowledgeable about the property in question.

To determine what fair market value is, it’s better to first look at what FMV isn't. Fair market value isn’t what you (the buyer or the seller) think the value is, it’s not necessarily the appraised price and it also isn’t the tax value.

How to calculate the fair market value of a home

Unlike other aspects of buying and selling real estate, there isn’t a defined formula for determining the fair market value of a home.

Since pieces of real estate are sold on the open market, the value of these financial assets are subject to the fluctuations of that market. Namely, supply and demand. Because of this, the buyer and seller’s individual circumstances and desire to buy and sell will greatly impact the fair market value of a home. This is why “fair market value” isn’t always what a piece of real estate is actually worth – it may depend upon what it is worth to either the buyer or seller.

With this in mind, here are the following ways a rough FMV can be calculated:

• 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 check out similar properties in the area to give you a better idea of what the fair market value of your property could be.

• Get an appraised value: A real estate appraiser can determine the property’s valuation. While not the final word on FMV, the appraised value can often suffice in the event a fair market value is needed. An appraisal also reinforces what a lender will allow a consumer to borrow on a home which often becomes by default an approximation of value on the open market.

• Find the price per square foot: You can also calculate a rough price per square foot. Look at comparable homes in your neighborhood then divide by square footage. Then take that dollar amount and multiply by the number of square feet in your home.

Fair market value FAQs

Let’s discuss some of the most frequently asked questions surrounding FMV.

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

A real estate appraiser can find the appraised value of a home, which can be used if a fair market value is needed. Appraisers determine a home’s valuation which helps lenders figure out how much they are going to let a potential buyer borrow on a home.

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

There are a couple of different ways you can calculate the fair market value of a home. You can agree on a number with the buyer after doing your own 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. Homeowners should understand that fair market value can impact their homeowners insurance claims, property taxes and other relevant legal disputes.

The bottom line: Fair market value helps determine property price

Fair market value isn’t just a fancy term that real estate agents made up – it’s a number that impacts almost everything: sales, insurance, inheritance and more.

It’s also important to note that fair market value can be calculated in a variety of ways and needs to be agreed upon by the buyer and seller. FMV is also important for calculating property taxes, insurance claims and settling legal disputes where property is involved.

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