Fair Market Value (FMV): What Is It and How Do You Calculate It?

When might a home not sell for fair market value?

There may be times when a home is sold above or below its FMV. For example, if a homeowner is facing an expensive family medical emergency and can’t make their mortgage payment or needs cash immediately to pay hospital bills, that is not a normal selling condition. The homeowner might be compelled to sell the house below its FMV.

Essentially, if either party is reacting to outside pressures, such as a medical emergency, loss of a job, or death in the family, while buying or selling a home, the home’s price point might drift away from its FMV.

5 ways to determine your home’s fair market value

Determining your home’s fair market value is one of the most important steps to take before listing. Price it too high, and your home could sit on the market longer than expected. Price it too low, and you could miss out on potential profits.

Getting the price right from the start is especially important in a balanced market, where neither buyers nor sellers have much of an advantage. In fact, 80% of agents say setting the right asking price upfront is one of the most important parts of selling a home.

Here are some dependable ways to figure out what your property is really worth.

1. Do your own market analysis, but have realistic expectations

Kent Pratt, a top real estate agent in Missoula, Montana, who works with over 72% more single-family homes than the average agent in his market, explains that when comparing your property to other houses in the neighborhood, make sure you’re doing a fair comparison to determine the best listing price.

Remember, the asking price doesn’t mean it will sell for that amount when the transaction is complete.

Even if your neighbor’s house doesn’t seem as nice as yours but sold for a higher price, there could be other factors, such as the market trends at the time it sold, upgraded features, or its larger lot size. These differences will affect the price even if you have the same square footage inside your house.

2. Get more details with a comparative market analysis (CMA)

When your real estate agent conducts a comparative market analysis (CMA), they look at everything that can affect your home’s value. This includes your property with all its amenities, tax history, the recent sales of other nearby properties, the neighborhood, school district, and market activity for your zip code.

The CMA is summarized in an extensive report, complete with photos and comparable properties. Pratt recommends using an experienced agent who won’t use “superior comparables” of upgraded properties that sold for a higher amount.

“That’s where you sometimes run into disagreements with owners or sellers of a property: [when] the appraisal or the CMA [isn’t] comparing like properties. You’re comparing a superior property or an inferior property to the seller’s property,” he explains.

For example, Pratt said if an agent uses comparable properties with granite countertops, hardwood floors, and stainless steel appliances, and your property doesn’t have those same features, it could affect the property’s true value by bolstering the price.

To set a strategic, realistic price, take advantage of the CMA that many real estate agents offer at no cost as part of their marketing strategy.

3. Order a home appraisal for a second opinion about the value

If you want to do a deeper dive into the value of your property, paying for a pre-listing appraisal could provide the added details you need.

What an appraiser typically won’t do

Appraisers shouldn’t be confused with home inspectors. They won’t climb up on ladders to walk on your roof or spelunk under your house. An appraiser’s analysis is grounded in their assessment of your home’s overall condition and how it impacts its value. They’re not there to point out home fixes you must address, but to determine how the property compares to similar homes in the market in terms of value.

How the appraisal process works

An appraiser will compile their report based on observations from their visit and use data from comparable properties. When you order a report from an appraiser, keep in mind that this typically would be for your information only.

The buyer’s lender usually hires their own independent appraiser per their financing guidelines. However, your appraisal can give you expert insights about your home’s FMV before the lender’s appraisal.

How to ensure a smooth appraisal process

Make the appraisal process easier by getting your home ready before the appraiser arrives. A little preparation can help avoid delays and highlight your home’s value. Here are some steps to follow:

• Clean and declutter the house: An appraiser shouldn’t have to climb over boxes to see areas of your house and assess them properly. So, before the appraisal, take time to declutter spaces in your home. Also, cleaning in general will help make the home show better to appraisers and buyers.
• Keep a tidy yard: If your grass is so tall that the appraiser would disappear while looking at your property, it’s probably a good time to mow. You want them to be able to see your entire yard and evaluate its curb appeal, and not, literally, get stuck in the weeds.
• Don’t be a helicopter owner: Appraisers don’t appreciate it when you try to “help” them do their assessment by following them around and telling them all the valuable things about your home (though you and your agent can submit a list of renovations and upgrades with any accompanying receipts to help them make their report as accurate as possible). They’re also not interested in your collections inside the house that would be moved.
• Avoid oversharing or arguing: Appraisers are there to assess your house, not judge you. Telling them your life story, confessing about every little issue with the home, or arguing will not be helpful. They’re only looking at what’s there and its current condition.

4. Use an online home value estimator (HVE)

If you simply want a ballpark idea about your home’s current FMV, you can use an online home value estimator. This method uses data based on your specific address, market conditions, and home sale transactions in your area to determine a value range. While this won’t be as comprehensive as a CMA or an appraiser’s report, it will inform you how your home’s value generally compares to others in the neighborhood.

Start researching your property by trying HomeLight’s Home Value Estimator. Just enter your address and answer a few basic questions to see an estimated value range for your home.

5. Get a home inspection to find out more about what affects your fair market value

According to Paul Angrisano, a certified residential appraiser from Baton Rouge, Louisiana, every house usually has $2,000 to $3,000 worth of issues if they’re similar in age, quality, and condition, such as a water heater at the end of its service life. But it’s the bigger things, like your roof or heating system, that can really affect the total value and your buyer’s financing decisions.

A buyer typically orders a home inspection soon after they’ve submitted an offer.

“If there’s one piece of advice I would give everybody all the time, it’s get a home inspection,” says Angrisano. “If you’re selling the house, it is way better to spend the $300 on that home inspection or whatever they’re charging for the complexity of the house you have, and know what the buyer’s home inspector is going to find and fix it,” says Angrisano.

Whether you choose one or several of these methods, remember that many considerations go into calculating FMV, and it’s not a one-size-fits-all.

How to calculate the market value of property

The comparable sales approach is one of the easiest ways to figure out what a home is worth. It involves looking at similar homes nearby that have sold recently and using those as a guide. To get a rough market value, you take the average price of at least three recent comps:

Market Value = (Sum of Adjusted Comparable Sale Prices) / Number of Comparables

To illustrate, let’s consider three comps:

1. Comparable A sold for $300,000, but it’s 100 square feet larger than your home. After adjusting down by $20,000, the adjusted price is $280,000.
2. Comparable B sold for $270,000 with no adjustments needed.
3. Comparable C sold for $310,000, but it doesn’t have a backyard like your home does. After adjusting up by $30,000, the adjusted price is $340,000.

Let’s calculate the market value:

Market Value = ($280,000 + $270,000 + $340,000) / 3 = $297,000

Thus, the estimated market value of your property is approximately $297,000.

Are there other ways to calculate fair market value?

Aside from the comparable sales approach, two other common methods for determining fair market value are the income approach and the cost approach.

What’s the difference between fair market value, market value, and appraised value?

Don’t confuse FMV with its two word relatives: market value and appraised value. They are distinctly and deliberately different. All three can be applied to the job of determining the worth of a property, but FMV is what it should sell for. Here’s a quick explanation for each of the terms:

Which value matters most to home sellers? The appraised value is often the most useful because it gives you an expert’s take on what your home is worth, considering its strengths, flaws, and how it compares to similar properties nearby.

What is fair market value used for?

Fair market value matters anytime you’re making big decisions about your home. Aside from helping you set the right listing price when it’s time to sell, it guides negotiations and ensures everyone knows what the home is truly worth. Here are some of the most common ways it comes into play.

• Insurance policies and claims: Knowing your home’s fair market value can help you understand its worth when choosing insurance coverage or filing a claim after a disaster.
• Investment assets: If you own rental properties or other real estate investments, fair market value helps you track how much your properties are worth and how they contribute to your overall portfolio.
• Legal disputes: Fair market value can help establish how much a property is worth when dividing assets during a divorce or handling a bankruptcy case. An accurate valuation gives everyone a clearer starting point for deciding how to divide property or settle financial obligations.
• Real estate taxes: Fair market value can help determine a property’s taxable value in certain situations, such as when ownership changes or a property is reassessed.

What are some pitfalls to watch out for when improving market value?

Angrisano says that thinking you can add value by making a major improvement is a common misunderstanding. ”Cost is not value.” He explains that if you install a swimming pool and it costs between $50,000 and $80,000, that doesn’t mean you’ll add that same amount to your home’s value.

Instead, he says it’s better to be an average home, not better or worse, because you’re being compared to other homes in your area.

“When people ask me how to improve their appraisal value, I typically tell them I would not do anything that I’m not going to have time to enjoy and feel like I got my money out of, other than making sure the property is in good repair, clean, and freshly painted. That is typically going to give you your best result,” says Angrisano.

He further explains that some improvements, such as spending $4,000 on new gutters, don’t “move the needle” as much as other features, including access to recreation or a prime location in a great school district.

»Learn more: Your home’s value can look different depending on whether you sell it as-is or put some money into repairs first. Try our Home Cash Offer Comparison Calculator to compare your options and get a better idea of which route could leave you with more money after the sale.

What happens to FMV in a seller’s market?

During a seller’s market, there’s limited inventory with high demand, and prices are raised due to competition. This means that your house could sell for well above the FMV because of bidding wars that inflate the price.

“Obviously, in a seller’s market, the seller is going to be more in control of what they’re willing to sell their property for,” explains Pratt. “I think throughout the process of selling the property, with multiple offers on a property, a lot of times the buyer is going to have little to no leverage in regards to the negotiation.”

What happens to FMV in a buyer’s market?

In a buyer’s market, there’s a lot of inventory with little demand, and home prices are usually reduced to sell quickly. This typically means your house could sell for below FMV since the buyer pool is smaller.

“There’s more initial negotiation room from a seller,” says Pratt. “You’re much more likely to be able to purchase a property at a lower price point than maybe what it’s listed for. And then through the process of negotiation, and performing a home inspection, if there are deficiencies brought out in that inspection that are recommended to be remedied, a seller is much more likely to cooperate with the buyer to keep the transaction in place.”

How do different neighborhoods influence FMV?

Neighborhoods closer to top-rated school districts and desirable neighborhoods typically have a big influence on FMV as more people seek out certain schools and neighborhoods, which increases demand.

“School districts, access to recreation — those are huge drivers,” says Angrisano. “If you look at good school districts, you’re going to see more new construction feeding into those schools.”

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Discover your home’s fair market value

As you move forward with your home sale plans, remember that FMV is determined by many pieces of the real estate puzzle. It’s different from market value and appraised value, or a home’s selling price versus its estimated worth. When researching your home’s FMV, keep these tips in mind:

• Make sure comparable properties are equally matched
• Request a comparative market analysis
• Consider ordering an appraisal before pricing your property
• Schedule a home inspection and fix issues to help your sale

The best way to explore FMV in more detail is to work with an experienced real estate agent in your area. HomeLight can connect you with a top-rated agent in your market. Our data shows that the top 5% of real estate professionals across the U.S. sell homes for as much as 10% more than the average real estate agent.

As you search for a good partner in your real estate journey, learn more about your home’s estimated value by using HomeLight’s Home Value Estimator.

Header Image Source: (iriana88w / Deposit photos)