Fair Market Value
What is Fair Market Value?
Fair market value (FMV) is defined as the price a ready, willing and able buyer, with knowledge of all pertinent facts, is willing to pay for a certain piece of property. Fair market value is the amount you may expect to receive from a sale of your real estate, or the price you may expect to pay when purchasing a certain property.
Though several equations may be used to determine fair market value, there is no one single formula to make a final determination in every case. The real estate market can fluctuate monthly, weekly, or even daily, and the fair market value is subject to change based upon the market.
Example
Owner A has a house in a neighborhood of $250,000 homes. Several have sold recently for an average of $250,000. Owner A’s home is nearly identical to those sold. If Owner A decided to place his home on the market, and could be expected to receive approximately $250,000, the property will have a fair market value of $250,000.
Fair market value and mortgages
Determining the fair market value is essential in obtaining a mortgage, be it for purchase refinance, or obtaining a home equity loan. Determining the fair market value is also essential in determining your equity in the property.
The mortgage lender will generally not be permitted to loan more than the fair market value, and usually, a percentage less than the fair market value.
How is fair market value determined?
Usually, the fair market value is determined by means of an appraisal. An appraiser is an individual trained and experienced in valuing real estate. The appraiser will physically inspect the characteristics and condition of the of the property, obtain an overview of the surrounding neighborhood and determine whether the property will be used for residential or commercial purposes. The appraiser will look to recent sales in the neighborhood, compare the sales and the homes sold in the area, and base a fair market value upon the comparable sales.
The appraiser may also consider the cost it would be to replace the property should a total loss of the property occur, and depreciate the property based upon its age and/or condition. If the property is normally a rental property, the appraiser may also consider an estimate of income to be received and determine value of the property using an income formula.
At First Foundation, we understand that the fair market value of your property is one of the first considerations in obtaining financing. We can discuss the potential fair market value of your property and arrange an appraisal with a licensed appraiser to determine your FMV.
Related Terms:
Equity, Appraisal, Appraised Value, Market Value
If you are interested in learning more about fair market value, please feel free to contact us today!