{"id":137298,"date":"2019-11-27T19:12:09","date_gmt":"2019-11-28T02:12:09","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/rei\/glossary\/fair-market-value-fmv"},"modified":"2021-04-09T12:26:31","modified_gmt":"2021-04-09T18:26:31","slug":"fair-market-value-fmv","status":"publish","type":"glossary","link":"https:\/\/www.biggerpockets.com\/blog\/glossary\/fair-market-value-fmv","title":{"rendered":"Fair Market Value (FMV)"},"content":{"rendered":"<div>Fair market value (FMV) is an assessment of an asset\u2019s value or worth. It\u2019s often used in tax law and the real estate market. The weight you place upon FMV will vary based on your objective\u2014for example, if you are buying a building, chances are you want to pay less than fair market value. If you&#8217;re a seller, you might be hoping for the highest price. And if you just bought real estate and want to flip the property, the FMV may determine the sale price.&nbsp;<\/p>\n<\/div>\n<div>Municipal property taxes are often assessed based on the property&#8217;s FMV. Depending on how long you&#8217;ve owned the home, the difference between the sale price and the property\u2019s FMV can be substantial.&nbsp;<\/p>\n<p><\/div>\n<section><strong>What investors will learn&#8230;<\/strong><\/p>\n<ul>\n<li>How to calculate fair market value for real estate<\/li>\n<li>Why fair market value is an important metric for investment success<\/li>\n<li>How fair market value affects your taxes.&nbsp;<\/li>\n<\/ul>\n<\/section>\n<div><\/div>\n<header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h3>Definitions of fair market value vs. market value<\/h3>\n<\/header>\n<div>Many people use the terms \u201cfair market value\u201d and \u201cmarket value\u201d interchangeably. And there are a lot of similarities! They both assess how much a buyer will pay\u2014and how much a seller will accept\u2014for a piece of real estate. Both terms attempt to answer, \u201cWhat will the market bear?\u201d &nbsp;<\/p>\n<\/div>\n<div>Fair market value, however, can carry additional legal requirements. In fact, the Treasury Department specifically dictates that, for a market value to be a fair value, both buyer and seller must be willing, have \u201creasonable knowledge\u201d of any relevant facts, and not be compelled to buy or sell. In short, they both must be entering the transaction of their own volition.&nbsp;<\/p>\n<\/div>\n<div>\u201cReasonable knowledge\u201d can get a little tricky. If you\u2019re pulling together a deal based on some insider information\u2014like you know that a new development is in planning a block away\u2014consider working with a lawyer to see what, if anything, you need to disclose. But in brief, this requirement ensures that neither the buyer nor the seller hide any salient facts.<\/p>\n<p><\/div>\n<div><em>Successful investing requires accurate, easy-to-understand information about your properties and the markets you invest in. <\/em><a href=\"https:\/\/www.biggerpockets.com\/bp-insights\" target=\"_blank\"><strong><em>BPInsights<\/em><\/strong><\/a><strong><em> gives you the information you need to find your next great deal and maximize your current investments<\/em><\/strong><em>\u2014and makes you a better investor along the way. Dive into our proprietary data sets and learn from our expert analysts today by <\/em><a href=\"https:\/\/www.biggerpockets.com\/membership-types\" target=\"_blank\"><em>becoming a BiggerPockets Pro Member today<\/em><\/a><em>.<\/em><\/div>\n<div><em><br \/>&nbsp;<\/em><\/div>\n<header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h2>How to calculate fair market value<\/h2>\n<\/header>\n<div>Fair market value is generally calculated in one of four ways\u2014the cost of the item, comparable property sales, replacement cost, or expert opinion.<\/p>\n<\/div>\n<div>The cost of an item is often, but not always, the FMV\u2014assuming you recently bought it in an arm&#8217;s-length, fair transaction. The more time since the purchase, the increased likelihood that the market may have changed. Some items, such as old furniture, are rarely worth the original cost unless they&#8217;re antiques. Additionally, when selling equipment that has been in use for years, depreciation should be considered, as well as aging and wear-and-tear. All of these will reduce FMV beneath the original sale price of the asset.&nbsp; &nbsp;&nbsp;<\/p>\n<\/div>\n<div>For real estate, comparable property sales are commonly used to determine a home&#8217;s fair market value. This method looks at similar properties\u2014or comparables, or &#8220;comps&#8221;\u2014that have sold in recent months, and use their selling price to decide the FMV. This standard is less reliable if the market changes quickly, or if the recent sales aren&#8217;t similar enough to the property. A two-bedroom home won&#8217;t help you price a three-bedroom; a split-level isn&#8217;t comparable to a ranch.&nbsp;<\/p>\n<\/div>\n<div>The replacement cost of buying a newer model of the item likely doesn&#8217;t represent the fair market value, but it does set an upper limit. If, say, you\u2019re replacing a five-year-old computer, the old model is probably worth substantially less than the one being bought.<\/p>\n<\/div>\n<div>Then there\u2019s the expert opinion. This method of calculating FMW is valuable if dealing in something collectible or if there are no good comparables. If a company is making a sizable non-cash donation to charity, the IRS may require an appraiser&#8217;s opinion to back up the fair market value claimed.<\/p>\n<\/div>\n<div>These methods can also help you calculate fair market value for properties.<\/p>\n<\/div>\n<header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h3>Price per square foot<\/h3>\n<\/header>\n<div>Price per square foot helps to determine the outer boundaries of what price range a property should fall into. However, price per square foot has some very serious limitations.<\/p>\n<\/div>\n<div>First, it fails to take into account some of the most important variables that affect home values, such as the condition of the property, the location of the property, the quality of finishes, and the lot size. That\u2019s why comps are so important. For condos, price per square foot doesn\u2019t account for variables like floor, views, outdoor space, and parking.<\/p>\n<\/div>\n<header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h3>Zillow and other real estate \u201cestimates\u201d<\/h3>\n<\/header>\n<div>No algorithm, no matter how sophisticated, can replace the human element needed to determine the true value of property.&nbsp;<\/p>\n<\/div>\n<div>That said, there is no harm in checking with online price valuation tools to get an idea of their value of the property. As an extra layer of security, review the home valuation accuracy for each city so you know how much weight to give the price estimate.<\/p>\n<\/div>\n<header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h3>Appraisals<\/h3>\n<\/header>\n<div>Appraisals are generally considered the most reliable home valuation tool. Yes, an appraisal is technically one person\u2019s opinion of a property\u2019s value\u2014but that person has been formally trained and certified.&nbsp;<\/p>\n<\/div>\n<div>The best appraisals are those performed by appraisers who do most or all of their business in the subject property\u2019s neighborhood. A few blocks can make a huge difference in value and location, especially in large cities.<\/p>\n<p><strong>LEARN MORE<\/strong><\/div>\n<ul>\n<li><a href=\"https:\/\/www.biggerpockets.com\/blog\/think-like-appraiser-determine-value?itm_source=ibl&amp;itm_medium=glossary&amp;itm_campaign=opt\" target=\"_blank\">DIY Appraisal: How to Choose the Best Comps<\/a><\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/blog\/13-ways-increase-rent-add-rental-property?itm_source=ibl&amp;itm_medium=glossary&amp;itm_campaign=opt\" target=\"_blank\">13 Proactive Ways to Increase Rent &amp; Add Value to Your Rental Property<\/a><\/li>\n<\/ul>\n<div><\/div>\n<header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h2>Why is the fair market value important?<\/h2>\n<\/header>\n<div>The FMV is the price that assets sell for&#8230;&nbsp;<\/p>\n<\/div>\n<ul>\n<li>On the open market<\/li>\n<li>To a willing buyer<\/li>\n<li>From a willing seller<\/li>\n<li>Performing in both parties&#8217; best interests<\/li>\n<li>Free of undue trade pressure<\/li>\n<li>Given a reasonable time period for completing the transaction.<\/li>\n<\/ul>\n<div>With these conditions in mind, an asset FMV should represent an accurate valuation or assessments of its monetary worth. &nbsp;<\/div>\n<div><\/div>\n<div>&#8220;Fair market value&#8221; is typically used in legal settings. For instance, the fair market value of the property is predominately used in divorce settlements and when calculating compensation from a government taking advantage of eminent domain. In addition, the IRS and local taxation authorities use fair market value to determine the property&#8217;s tax assessment or for a tax deduction after a casualty loss. <\/p>\n<figure data-trix-attachment=\"{&quot;content&quot;:&quot;\n\n<div class=&quot;video-embed&quot;><iframe width=&quot;560&quot; height=&quot;315&quot; src=&quot;\/\/www.youtube.com\/embed\/uW8_W2ztPa4&quot; frameborder=&quot;0&quot; allowfullscreen><\/iframe><\/figure>\n<\/div>\n<p>&quot;,&quot;contentType&quot;:&quot;application\/youtube-video.html&quot;}&#8221; data-trix-content-type=&#8221;application\/youtube-video.html&#8221; class=&#8221;attachment attachment&#8211;content&#8221;><\/p>\n<div class=\"video-embed\"><iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"\/\/www.youtube.com\/embed\/uW8_W2ztPa4\" frameborder=\"0\" allowfullscreen=\"\"><\/iframe><\/div><figcaption class=\"attachment__caption\"><\/figcaption><header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h2>Fair market value and taxes<\/h2>\n<\/header>\n<div>The Internal Revenue Service (IRS) wants transactions to happen at fair market value. For instance, let&#8217;s say a parent sells shares in their family business to their college student for $1 so that the student may be an owner of the small business. If the shares&#8217; FMV is higher, tax authorities (e.g. the IRS) may recharacterize the transaction for tax purposes. The parent will then need to pay income taxes on the disposition of shares as though they had sold them at FMV to a third-party. &nbsp;<\/p>\n<\/div>\n<div>FMV is essential when donating property, too, such as artwork to charities. In this event, the donor typically receives a tax credit for the value of donation\u2014so tax authorities must make sure that credit is for the true FMV.&nbsp;<\/p>\n<\/div>\n<div>Appropriately applying fair market value to tax returns prevents adverse implications later or potential claims of fraud.&nbsp; &nbsp;<\/p>\n<\/div>\n<header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h3>FMV special cases<\/h3>\n<\/header>\n<div>If setting fair market value affects an individual&#8217;s income taxes, the IRS may have specific guidelines to follow. For instance, if a small business owner provides employees with a company car as a benefit, the IRS formulates several methods of FMV calculations, such as the standard mileage rate multiplied by the number of miles in a given year.&nbsp;<\/p>\n<\/div>\n<div>FMV is also often used in the insurance industry. For example, when an insurance claim is made after a car accident, the insurance company covering the damage to the owner&#8217;s vehicle usually covers damages up to the vehicle&#8217;s FMV.<\/div>\n<div><\/div>\n<header><\/header>\n<header><\/header>\n<header><\/header>\n<header>\n<h2>Fair market value and real estate: An example<\/h2>\n<\/header>\n<div>Real estate agents typically prepare a comparative <a href=\"https:\/\/www.biggerpockets.com\/guides\/real-estate-market-analysis?itm_source=ibl&amp;itm_medium=autog&amp;itm_campaign=guide\" target=\"_blank\">market analysis<\/a> (CMA) when looking to sell a property. A CMA will give the seller an idea of what a buyer might pay for the property. During the CMA, the agent compares the subject property with comparably sold properties.<\/p>\n<\/div>\n<div>For example, if you have two identical properties next door to each other and one sells for $100,000, then the second property should be able to sell for at least $100,000.&nbsp;<\/div>\n<div><\/div>\n<div>But the sales comparison goes beyond looking at just one recent sale, taking into account multiple recent sales\u2014generally at least three properties. For example, there are four identical houses in the same neighborhood. Three of the houses recently sold for $100,000, $130,000 and $125,00. To calculate FMV you would add up the three sale prices and divide the number of properties. In this case, the FMV is $118,333.<\/div>\n","protected":false},"featured_media":0,"parent":0,"menu_order":0,"template":"","letter":[7247],"class_list":["post-137298","glossary","type-glossary","status-publish","hentry","letter-f"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/glossary\/137298","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/glossary"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/glossary"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=137298"}],"wp:term":[{"taxonomy":"letter","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/letter?post=137298"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}