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What Is Fair Market Value (FMV) and How Do I Determine What My Home Might Be Worth?

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All the fun memories you have enjoyed in your home are priceless. But the house itself will get a certain price when you sell it, often based on its fair market value (FMV). But what is fair market value? How is it determined? And how is it different from market value or appraised value?

To get you the best answers, we asked award-winning real estate agent Kent Pratt from Missoula, Montana, and certified residential appraiser Paul Angrisano from Baton Rouge, Louisiana. Through their expertise and our extensive research, this post will provide the answers you’ll need before you sell your home.

Several factors determine the FMV and every property is different. Just like a puzzle has many pieces to see the entire picture, your home’s fair market value is determined by many pieces of information to see the total value when compared to other homes.

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What is fair market value?

The definition of fair market value by the Internal Revenue Service is:

Section 1.170A-1(c)(2) states that fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts. 

Meaning there’s no pressure to buy or sell the home and both sides have the same information about a property for making a sound financial decision. This would be considered a normal market and lacks the immediate need to act, usually getting you closer to the fair market value.

To put it another way, fair market value doesn’t necessarily represent the value of the home. Instead, it is somewhat hypothetical. It represents the estimated amount of money a buyer and seller would likely agree upon through negotiations and under normal conditions.

When might a home not sell for fair market value?

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

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

Sold properties are always going to be your best indicator of value. Because there are obviously active properties and there can be properties that are currently under contract. But there’s a reason why the appraisers are using the sold properties in their appraisal and that is a definitive value versus a value that’s yet to be determined.
  • Kent Pratt
    Kent Pratt Real Estate Agent
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    Kent Pratt
    Kent Pratt Real Estate Agent at Windermere Real Estate
    • Years of Experience 30
    • Transactions 62
    • Average Price Point $360k
    • Single Family Homes 52

5 ways to determine your home’s fair market value

1. Do your own market analysis but have realistic expectations

Pratt, 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. Because the asking price doesn’t mean it’s going to sell for that amount when the transaction is complete.

“Sold properties are always going to be your best indicator of value. Because there are obviously active properties and there can be properties that are currently under contract. But there’s a reason why the appraisers are using the sold properties in their appraisal and that is a definitive value versus a value that’s yet to be determined,” says Pratt.

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 being on a larger lot. These differences will affect the price even if you have the same exact square footage inside your house.

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

When your real estate agent conducts a comparative market analysis they’re looking at everything that can impact 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 usually an extensive report with photos and comparable properties included. Pratt recommends that it’s best to use 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 and the appraisal — or the CMA — is you’re not comparing like properties. You’re comparing a superior property or an inferior property to the seller’s property.”

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

Many real estate agents offer free CMAs 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 on the value of your property, paying for a pre-listing appraisal could provide the added details you need.

A typical appraisal includes:

  • A tour of your home and the property
  • Reviewing the overall condition of the property
  • Noting any obvious maintenance issues that affect value
  • Taking in account any improvements that have been made

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 based on what they observe about the condition of your home — they’re not looking for every little necessary repair.

How the appraisal process works:

An appraiser will compile their report based on observations from their visit along with using data from comparable properties. When you order a report from an appraiser, keep in mind this typically would be for your information only. Because the buyer’s lender will usually hire their own independent appraiser per their financing guidelines. However, your appraisal can give you expert insights about the value of your home prior to the lender’s appraisal.

Ways for an appraisal to go smoother

  • Clean and declutter the house – An appraiser shouldn’t have to climb over boxes in order to see areas of your house to assess them properly. Also, cleaning in general will help make the home show better with buyers.
  • Yard work is not optional – If your grass is so tall 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 not, literally, get stuck in the weeds.
  • Don’t be a helicopter owner – Appraisers don’t usually appreciate when you try to “help” them do their assessment by following them around 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.
  • Oversharing or arguing isn’t helpful – 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.
A couple researching online about fair market value.
Source: (Tezos / Unsplash)

4. Use an online home value estimator (HVE)

If you want a ballpark idea about your home’s current value, one tool you can use is an online home value estimator. This method works by using 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 give you information of how your home’s value generally compares to others in the neighborhood.

If you want to get started researching your property, try HomeLight’s Home Value Estimator now. 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 value

According to Angrisano, every house usually has $2,000-$3,000 worth of issues if they are similar in age, quality and condition, such as a water heater being 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. This is because the buyer wants to protect their investment. They will typically order a home inspection soon after an offer has been submitted.

“If there’s one piece of advice I would give everybody all the time, it’s get a home inspection. Because 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/or 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.

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

Don’t confuse fair market value 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 fair market value is what it should sell for.

Fair market value – Value of the home is based on normal market conditions, buyers and sellers are not overly eager to buy or sell a home and both parties have the same information.

Market value – The home’s value is based more on the supply and demand of the market and can be more volatile as values can either be pressed high or low based on current conditions.

Appraisal value – Your home’s value is reviewed independently by an appraiser who considers its specific location, condition, amenities, and other properties that are comparable to it.

Which value matters most to home sellers?

Appraised value is typically considered most important to sellers because the property is expertly evaluated based on its specific merits and deficits in comparison to other similar properties.

What is fair market value used for? 

  • Insurance policies and claims – insuring or rebuilding a home after a disaster
  • Investment assets – determining real estate value for your investment portfolio
  • Legal disputes – assessing the value for a bankruptcy or divorce
  • Taxes – assessments for calculating property taxes
A person with their phone, researching fair market value.
Source: (Toa Heftiba / Unsplash)

Q&A: Other things you should know about FMV

What challenges or mistakes come when assessing fair market value?

Angrisano says that thinking you can add value by doing a major improvement is a common misunderstanding. ”Cost is not value.” Angrisano explains that if you install a swimming pool and it costs between $50,000-$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 it up, fresh paint. That is typically going to give you your best result,” says Angrisano.

Also, Angrisano explains that some improvements, such as spending $4,000 on new gutters, doesn’t “move the needle” as much as other features, including access to recreation or being in a great school district.

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 fair market value 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. 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,” explains Pratt.

What happens to FMV in a buyer’s market?

When you have a buyer’s market there’s lots of inventory with little demand and prices of homes 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, you’re much more likely to be able to purchase a property at a lower price point then 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,” says Pratt.

How do different neighborhoods influence FMV?

Neighborhoods that are 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, yeah, access to recreation, those are huge drivers, and I mean, if you look at good school districts you’re going to see more new construction feeding into those schools,” says Angrisano.

Bottom Line — 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. Find a top-rated agent by using Homelight’s free Agent Match Tool. Our data shows that the top 5% of real estate agents across the U.S. sell homes for as much as 10% more than the average real estate agent.

Also, a great starting point to learn more about your home’s estimated value is using HomeLight’s Home Value Estimator.

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