When buying or selling a house, you’ll often hear the term “fair market value” or FMV. This concept plays a crucial role in shaping the dynamics of real estate transactions.

    FMV helps sellers understand the right price point to list their property to ensure it’s neither overpriced nor undervalued. On the other hand, buyers use FMV to understand the difference between getting a great deal and potentially overpaying for a property. Lenders also use FMV during the loan approval process.

    So, what is fair market value? While fair market value might seem like a straightforward concept, the components that make it up can be confusing. Keep reading to learn more about FMV, what it’s used for, and how it’s determined.


    • Fair market value guides home sellers on pricing and helps home buyers avoid overpaying while being a crucial factor lenders use to determine loan amounts. 
    • Multiple factors influence FMV, including property conditions, market conditions, and unique property features.
    • Appraisers and real estate agents can provide the most accurate fair market value estimates by considering a range of data points. 
    • Lenders, insurance companies, and local tax authorities rely on FMV for loan approvals, setting premiums, and determining tax assessments.

    What Is Fair Market Value?

    In the real estate world, fair market value refers to the estimated price of a property that would be exchanged between a buyer and seller. The buyer and seller must have adequate knowledge of the facts, and neither can be forced to buy or sell.

    The FMV represents an ideal price point, considering all relevant factors and current market conditions, where both parties get a fair deal.

    Determining fair market value depends on several factors, including:

    • Comparative market analysis (CMA)
    • Professional appraisals
    • Market trends
    • Property characteristics

    While it might seem arbitrary, FMV serves as a crucial metric in the real estate industry and ensures transparency, fairness, and informed decision-making.

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    Uses for Fair Market Value

    Fair market value provides a standardized benchmark for assessing the value of a property. It’s used by buyers, sellers, real estate agents, insurance companies, and lenders for various purposes.

    Here are a few of the most common uses for fair market value:

    • Buying and selling property: When selling your house, you should aim to set a price close to the FMV to ensure a fair deal and improve the chances of a swift sale. Understanding the FMV helps buyers make informed decisions, preventing them from overpaying for a property.
    • Mortgage approval and refinancing: Lenders evaluate the FMV of a property when determining how much to lend to a borrower. Lenders might be hesitant if the home loan amount requested exceeds the FMV. During refinancing, the FMV helps determine how much equity homeowners have, which can influence the terms and approval of the refinancing.
    • Property tax assessments: Local taxation authorities use FMV to calculate property taxes. If a home’s fair market value increases, homeowners might see an increase in their tax bill.
    • Insurance premiums: Insurance companies rely on fair market value to determine coverage amounts and premiums for homeowner’s insurance. If a property’s FMV is high, the replacement cost in case of damage would also be higher, leading to more expensive premiums.
    • Estate planning: For families managing inheritance or estate planning, determining the FMV of the family home or other assets ensures that everything is distributed or sold fairly, ensuring equitable distribution among beneficiaries.
    • Investment analysis: Real estate investors use fair market value to gauge the profitability of an investment. By comparing the purchase price with the FMV, investors can determine potential returns and decide whether to buy, sell, or hold a property.
    • Leasing: Landlords and property managers can use FMV to set rental prices for their properties. Ensuring that rent reflects the fair market value can attract tenants and optimize rental income.

    How to Determine Fair Market Value

    There’s no one-size-fits-all formula to calculate fair market value. Instead, this value is determined by various factors, including:

    • Comparative sales: One of the most common methods used to estimate fair market value is to analyze the recent sale prices of properties similar in size, location, and condition. Known as comps, they provide a baseline for what buyers might be willing to pay.
    • Location: A property’s proximity to amenities, schools, and parks and neighborhood desirability can significantly affect its FMV.
    • Condition and age of the property: A newer or recently renovated home can command a higher fair market value than older homes in need of repairs.
    • Market conditions: The overall health of the real estate market, including factors like interest rates, inventory, and economic forecasts, can sway FMV. For instance, house prices during inflation tend to rise, reflecting the broader economic landscape and its impact on real estate values.
    • Unique features and amenities: Properties with unique features, such as pools, energy-efficient appliances, and stunning views, may have different FMVs compared to standard homes in the same location. These features often cater to specific buying preferences, which can influence value.
    • Historical data: Trends based on past real estate transactions in the region can give insights into the potential appreciation or depreciation of property values over time, providing a more comprehensive view of the FMV.
    • Supply and demand: The balance of available properties versus the number of interested buyers in the area can influence the FMV. High demand with limited supply often drives prices up, while an oversupply with little demand can push prices down.

    Man conducting a home appraisal to determine the fair market value

    The most accurate method for determining fair market value is a professional appraisal. A licensed appraiser will conduct a thorough inspection, consider comps, and provide a detailed report on the property’s FMV. Additionally, appraisers use industry-standard techniques and tools to ensure a precise valuation. Their impartiality ensures the estimated value is free from biases or external influences.

    Experienced real estate agents also understand the local market and know how to determine the fair market value based on recent comps. At the same time, you can look at local property tax assessments for a ballpark figure.

    Why Is FMV Important in Real Estate?

    Fair market value is especially crucial for buyers who need a mortgage. The FMV of a property can determine how much a lender is willing to offer as a mortgage. Lenders typically finance a percentage of a home’s FMV, not just the purchase price.

    FMV is also used for important calculations like loan-to-value ratio (LTV). This metric is the ratio of a loan to the value of the purchased property. A high LTV often signifies high risk. The FMV provides this ratio’s “value” component, influencing terms and interest rates.

    When you apply for a mortgage, lenders commission an independent appraisal to determine the property’s fair market value. During the mortgage underwriting process, the FMV is used to ensure the lender isn’t lending more money than the property is worth, protecting their investment and your interests. If you are buying a rental property and doing a DSCR loan, a Collateral Desktop Analysis (CDA) may be required in addition to the appraisal. The CDA helps the lender close the gap between the initial appraiser’s value and the CDA appraiser’s review. 

    Even if you already have a mortgage, FMV may still affect you. For instance, homeowners looking to tap into their home equity through a loan or refinance will find that fair market value determines their accessible equity and how much they can borrow.

    Fair Market Value: The Key to Better Investments

    Fair market value affects many aspects of the home buying and selling process. FMV offers both buyers and sellers a reliable benchmark to ensure properties are not overpriced or undervalued while influencing lending decisions and determining tax liabilities.

    Understanding fair market value becomes more straightforward with a trusted partner. Griffin Funding helps homeowners and investors navigate FMV to guarantee informed decisions. Our experienced professionals ensure you’re always equipped with accurate and up-to-date FMV insights.

    Want access to even more tools to help you manage your finances and learn about the real estate market? Download the Griffin Gold app to get tools that help you keep track of your finances, monitor home values, browse real estate listings, and more.

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    Frequently Asked Questions

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

    span>To calculate the fair market value of your property, you can start by researching recent sale prices of comparable properties in the area. These comps should be similar in size, location, condition, and features.

    For a more precise evaluation, consider hiring a professional appraiser who can consider various factors, such as the home's condition, neighborhood, future developments, market trends, and more, to provide an accurate FMV.

    What is the difference between fair market value and assessed value?

    FMV is the estimated price a property would sell for in the current market, representing an ideal transaction under existing market conditions. On the other hand, the assessed value is a valuation set by local government entities, primarily for tax purposes.

    A property's assessed value is often a percentage of its fair market value. It can be influenced by periodic assessments and specific criteria set by the taxing authority.

    Simply put, while the FMV aims to capture a property's real-time market worth, the assessed value is a basis for determining tax obligations.

    Are houses sold at fair market value?

    Houses are often listed with a price close to their fair market value to attract potential buyers and ensure a timely sale. However, the actual sale price can vary depending on various factors like market conditions, the urgency of the seller, and negotiation outcomes. While the FMV provides a benchmark, the final transaction price can be above, below, or spot on.
    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.