If you’ve ever bought, sold, or owned property, then you’ve probably fun into the term “Fair Market Value.” Although it’s a widely used phrase, and one that is very important in both the selling and purchasing of property, many people have a limited understanding of exactly what Fair Market Value is and why it’s important.
Before you list a house for sale, refinance your home, or decide to put in an offer, having a solid understanding of the Fair Market Value of a home can be an essential part of making an informed decision.
What is FMV?
FMV stands for Fair Market Value and is a term that is often thrown around in the world of real estate. In order to determine the Fair Market Value of a home, it’s vital first to understand precisely what the phrase “Fair Market Value” itself means. The term itself can be confusing, as it’s actually quite broad. But, put simply, Fair Market Value is “the price that property would sell for on the open market.”
FMV is most often used when talking about the buying or selling of a home or property, but on a broader spectrum, it relates to any item that is “bought, sold, or donated and has tax consequences.” The IRS uses Fair Market Value to determine whether or not an item that is sold or donated has been correctly valued for the purpose of income taxes. Because of this, accurate calculations of the FMV of a home is important. If FMV is audited and found to be incorrect, not only can you be subject to more tax, but penalties and consequences can occur.
Discovering you owe more tax money than you thought is never a pleasant surprise. Neither is listing your property only to discover your asking price is widely inaccurate or putting in an offer on a home that’s far too expensive.
Determining the FMV of a property is a crucial first step if you plan on selling, refinancing, or borrowing against your home. Similarly, if you plan on buying a home, determining the Fair Market Value will give you a fair estimation of what you can realistically expect to pay for a property. The listed asking price is not always accurate, which is why the Fair Market Value can be just as important for a buyer as it is for a seller.
How to determine the Fair Market Value of a home
There are several different ways to obtain the most realistic FMV possible. As mentioned above, accuracy is critical, so it’s often a good idea to use multiple different methods to ensure precision. Knowing how to find the fair market value of a home is essential for buyers and sellers alike. Sellers will need it to price the house correctly, and buyers will need it to ensure they don’t overpay.
Use an online Fair Market Value calculator
Whatever your reasoning, if you are curious about what the FMV of a home is, the most natural place to start is with a Fair Market Value calculator. There are a number of options online, but some will be more accurate than others. Make sure to fill in all information correctly and include any upgrades made to the home, as inaccurate information will lead to swayed results.
Run a CMA
CMA stands for Comparative Market Analysis and compares your property to other similar properties in order to statistically breakdown what your home may be worth. By matching comparable properties that have similar features (like the number of bedrooms, size of the lot, and previous selling prices), a CMA is a good way of determining the Fair Market Value of a home. Comparative Market Analysis is also the most widely used resource for real estate agents when verifying a realistic FMV for their clients.
Use an appraiser
This option is well-known because it’s an essential step that is often required when a home is active under contract. Mortgage companies will usually obligate buyers to attain an appraisal of a home in order to make sure the FMV is as accurate as possible. Sellers can also get their home professionally appraised before listing it in order to determine what they can expect to sell the property for. However, appraisals often cost between $300 and $600, and since they are usually required for buyers by mortgage companies, a seller will more often use other, cheaper methods of determining FMV to decide upon a listing price.
Calculate the FMV of the home yourself
This option isn’t popular because it requires individuals to have some knowledge of exactly how to calculate FMV. But some people like to take matters into their own hands, and by crunching the numbers yourself, you can have full insight into how you determined the FMV of your property and whether or not you believe it to be reliable. If you want to calculate your own FMV, you’ll need to have an understanding of recently sold properties in your area that are similar to your own. It’s best to look up how to calculate FMV in depth. You can also determine FMV by requesting a copy of the property tax assessment of your home or determining it yourself from the rate of taxation.
All in all, whether you are a buyer or a seller, Fair Market Value is an integral part of any transaction. If you are listing a home, you need to make sure that you have a good overview of FMV in order to determine an asking price. Similarly, as a buyer, determining the reliable Fair Market Value of a home is essential in making sure you get a good deal.