How to Determine Fair Market Value of Your Home

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|13 min read

Perhaps you’ve recently ordered an appraisal on your home. Or maybe you want to get a better understanding of your home’s current value. Did you know that an appraisal might not give you the fair market value of your home?

So, what is your home really worth in today’s market?

Determining the fair market value of the home requires more than just online estimates. A home’s value constantly changes based on location, upgrades, neighborhood trends, and, most importantly, market conditions.

Knowing your home’s fair market value provides key insight whether you are thinking of selling, buying another property, or just wanting to assess your investment.

What is Fair Market Value (FMV)?

According to the IRS, “fair market value (FMV) is the price a property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act and both having reasonable knowledge of the relevant facts.”

Determining a property’s FMV is an important part of buyers’ and sellers’ real estate transactions.

For sellers, knowing a property’s FMV helps set an optimal asking price that will attract fair offers and maximize the sale price. Pricing a property accurately based on FMV helps prevent underselling and leaving money on the table.

For buyers, understanding FMV allows them to make informed decisions on properties and avoid overpaying. Buyers can assess if a property’s asking price aligns with its objective market value or if sellers are overpricing. Knowing FMV provides buyers more leverage in negotiations.

However, knowing a property’s fair market value is also important for owners. It helps them assess how their investment has appreciated, how much equity they have, and make strategic decisions.

If you’re a property owner, you always get an appraisal, but often, those figures are outdated or overly conservative. You want to know approximately how much your home would sell for if you chose to list it in current market conditions.

What is Fair Market Value Used for?

Fair market value is used in more situations than just a home sale. FMV impacts a variety of financial matters outside of a transaction, including:

  • Insurance Implications
    Homeowners’ insurance policies frequently rely on the FMV to determine policy rates. The FMV helps to estimate the “replacement cost” of the home—what it would cost to rebuild the house if events like fire or flooding damaged it. This replacement cost is based on the current FMV, not the original purchase price, which could be outdated and irrelevant to today’s market conditions. The FMV helps insurers gauge the home’s current worth and set premiums accordingly.
  • Property Tax Assessments
    Local governments assess the FMV of your home and apply a specific tax rate to determine your annual property tax bill. For instance, if your home has an FMV of $300,000 and your county’s property tax rate is 3%, your yearly property tax would be $9,000. Make sure to check your local jurisdictions’ tax rate and frequency of reassessment, as this varies drastically by state and county.
  • Legal Contexts
    Whether it’s a divorce settlement, damage claims for private property, or the division of assets among heirs, FMV provides a standardized measure to prevent one party from taking unfair advantage of the other. It serves as a neutral ground for assigning values to shared assets, simplifying negotiations and potential conflicts.
  • Other Tax Considerations
    Beyond property taxes, FMV also influences other forms of taxation related to real estate, such as estate, gift, and inheritance taxes. In cases where a property is inherited or gifted, the tax liability is calculated based on the FMV of the home at the time of transfer, irrespective of how the new owner came into possession of the property.

The Difference between FMV and a Home Appraisal

On the surface, fair market value and an appraisal appear interchangeable—two estimates of what a home is worth. But there are some key differences.

Fair market value is how much the home would sell for right now in an open market between a ready buyer and seller. It represents what the general market would pay. In comparison, the appraised value is derived from a professional assessment of the home’s value for a specific purpose. Most often, an appraisal is done by a licensed appraiser to get a mortgage or refinance a loan. Appraised value provides a singular valuation matching the home’s existing features and is based on recent comparable sales.

The appraised value is not used for insurance or tax purposes; this is where FMV comes into play. Lenders need appraisals to mitigate risk on the property. But only fair market value can answer the question of what a buyer should pay for a seller’s home, how much should be paid in gift tax, or the cost of insurance.

How to Calculate Fair Market Value?

Unlike calculating fees or taxes, there is no singular formula for determining a home’s fair market value (FMV).

Because FMV is highly dependent on market fluctuations (supply and demand), the most accurate way to calculate FMV would be to list the property on the open market, receive offers, and negotiate a contract. But that isn’t realistic if you aren’t actually planning to sell.

So, how exactly should you calculate the fair market value for a property? There are four typical ways that FMV is calculated:

  • Sell on the open market.
    As mentioned, FMV represents the realistic value a seller and buyer would agree on in a property transaction. Listing on the market is the most realistic way to take into consideration current market conditions.
  • A price per square foot rate.
    When you review recent sales of properties in the same area of similar quality and size, you can divide their sale price by size to get a price per square foot. Then, apply this rate to the subject property to get an estimated FMV.
  • A comparative market analysis.
    Compile a list of similar properties (at least 3-5) and their achieved sale price to estimate your property’s FMV. The best way to get an accurate comparative market analysis is to work with a real estate agent with the experience and data to evaluate. Connect with a local real estate agent with FastExpert.
  • A professional appraisal.
    While it might not be the cheapest route, as appraisals typically cost about $500, an appraisal can provide an impartial opinion of value.
  • Get an online estimate.
    An online AI-assisted platform like Zillow’s Zestimate can provide a ballpark figure for FMV. However, accurately assessing FMV requires digging into property specifics and market data.

How is FMV Determined?

Determining a property’s fair market value (FMV) accurately requires a multi-faceted analysis by real estate and valuation professionals.

When determining FMV, real estate agents or valuers will use:

  • Recent comparable sales of similar nearby homes to provide a baseline for FMV.
  • The specific details of the subject property include location, curb appeal, renovations, schools, and other amenities.
  • Current real estate market conditions. In a hot seller’s market, FMV trends are higher due to high demand. In a cool buyer’s market, values trend lower from reduced demand.

This approach uses facts and expertise to remove pricing biases and estimate true market value.

What is a Comparative Market Analysis?

A comparative market analysis (CMA) is when a real estate agent looks at 3-5 recent sales of similar homes nearby to help come up with a recommended listing price for a seller or FMV. The agent makes dollar adjustments for how the comparable homes differ from the subject home in size, upgrades, condition, etc.

The adjusted sales prices are averaged to gauge the current market value.

Factors Influencing Fair Market Value

Determining a home’s fair market value is part art, part science – a blend of objective and subjective factors. Multiple factors impact what a home’s fair market value will be.

Location

Location remains one of the top influences on a property’s value. Desirable locations near amenities and low-crime areas command higher values. Accessibility to jobs, schools, transit, shopping, and recreation also boosts FMV.

Age and Condition

Well-maintained homes with modern systems and finishes hold value better. Wear and tear or outdated or faulty features that need renovations decrease FMV.

Market Conditions

Market conditions impact FMV significantly. In a seller’s market, value trends go up when buyer demand is high. In buyers’ markets with low demand, values decline. Macroeconomic conditions and interest rates heavily impact market conditions. Local supply and demand dynamics affect individual property values directly.

Recent Comparable Sales

Comparable sales provide crucial data points for determining FMV. Sales prices of similar nearby homes adjusted for differences reveal what buyers are currently paying.

Unique Features and Upgrades

Remodels, custom touches, pools, and high-end appliances can increase FMV. Outbuilding recreational features also command premium pricing. Their impact on price can be difficult to understand, which is why it’s smart to get professional help when estimating the FMV of a home with unique features.

Lot Size and Usability

The land holds value on its own. Larger lots allow more functional space and privacy, increasing value. Odd shapes or topography can limit usability, decreasing FMV. Access and visibility are also important lot attributes.

What Challenges or Mistakes Come When Assessing Fair Market Value?

Missteps may happen during FMV assessments, leading to incorrect valuations. Even experienced real estate pros can fall into common traps.

Some specific challenges that can throw off fair market value include:

  • Relying solely on emotion rather than objective data points.
  • Using outdated comparable sales that don’t reflect the current market.
  • Making blanket adjustments rather than property-specific condition analyses.
  • Not verifying comparable property details and features.
  • Ignoring prevailing market trends of rising or declining values.
  • Assuming all factors are equal amongst comparable properties.

When to Reassess Your Home’s Fair Market Value

While a home’s value tends to appreciate over time, certain events and situations may warrant reassessing your property’s current fair market value (FMV):

  • You are preparing to sell your home – Calculating your home’s up-to-date FMV using recent comparable sales helps you price and market it competitively. This typically involves a comparative market analysis from an agent and/or professional appraisal.
  • You are refinancing your mortgage – Lenders will require an appraisal to ensure your home value still supports the refinanced loan amount.
  • You’ve made significant upgrades or renovations – Major improvements like adding a pool, bedroom, or renovated kitchen can increase FMV and are worth reassessing.
  • You notice declining nearby property conditions – Factors harming neighborhood appeal, like increased crime, blight, or noisy developments, can negatively impact FMV.
  • Getting new homeowners’ insurance. It’s important to have an updated FMV when seeking new homeowners’ insurance to make sure you’re adequately covered.
  • Local market values are rising or falling – Keeping a pulse on real estate trends helps you understand if your home’s worth changes with the market.
  • You need an accurate valuation for legal purposes – Situations like separating assets in a divorce or after the death of a family member require current FMV estimates.

Rechecking your home’s fair market value provides useful insight into its present standing and equity position. It allows you to make informed decisions as a homeowner and real estate investor.

Market Fluctuations

Local real estate market shifts can significantly impact an individual home’s fair market value (FMV). When demand rises rapidly in a hot market, FMV may quickly climb above a recent appraisal.

Conversely, a cooling market with reduced demand can lower FMV. Monitor market conditions and indicators like median sale prices, days on the market, and list-to-sale ratios to keep a pulse on market trends.

After Major Renovations

Completing major upgrades or renovations directly affects your home’s fair market value, ideally increasing it. Adding a bedroom, remodeling the kitchen or bathrooms, finishing a basement, installing a pool, or other significant improvements can increase FMV substantially. Once work is completed, have your home value reassessed to document the new higher value of your investment in the property.

Neighborhood Developments

Changes in your immediate neighborhood can also impact your home’s fair market value for better or worse. Nearby, new construction, schools, parks, transit, and desirable amenities can make the area more appealing and boost value. However, increased crime, foreclosures, noisy developments, or environmental issues can negatively affect FMV. Stay aware of area changes that may necessitate looking at your home’s value again.

Do Your Own Market Analysis but Have Realistic Expectations

Tracking recent comparable sales can provide general insight into market trends and your home’s estimated value range. However, a DIY approach has limitations and is often unusable for official purposes. The most accurate update requires working with real estate and valuation professionals. Expect do-it-yourself FMV estimates to be useful but not definitive.

A Real Estate Agent Can Help with Fair Market Value

While you can look at market data on your own, partnering with a real estate agent provides significant advantages. An agent accurately assesses your home’s fair market value (FMV) with:

  • Access to MLS data
    Agents can access detailed information on recent comparable sales not available to the public. This includes specifics on features, upgrades, square footage, days on the market, etc.
  • Objective perspective
    Agents rely on data, not emotions, to recommend pricing. They aren’t attached to your home’s value emotionally.
  • Experience
    Agents regularly analyze sales and determine listing prices. They are in tune with what local buyers are willing to pay.
  • Up-to-date market expertise
    Full-time agents have their fingers on the pulse of the latest market shifts that impact values.
  • Detailed CMA
    Agents can provide a thorough comparative market analysis report detailing adjustments made to recent comps.
  • Appraiser connections
    Agents often consult with appraisers and can recommend ones they work with regularly.

While DIY valuation has a place, partnering with an experienced local real estate agent provides immense help in accurately assessing your home’s current fair market value. Their expertise and tools lead to a solid pricing strategy.

Find a Top Restate Agent with FastExpert

Determining your home’s fair market value takes experience, market insights, and data you may not have access to on your own. For the most accurate assessment of what your house is truly worth, partner with a top local real estate agent.

The right agent will provide a detailed comparative market analysis, adjusting recent sales of similar homes to evaluate your property’s value. They can access MLS data on the latest listings and incorporate market shifts into their valuation. Leaning on an agent’s expertise removes guesswork and emotions from the equation.

Let an expert guide you to a fair price. Finding the top real estate agents in your area is easy with FastExpert. Check out FastExpert’s list of the best agents working in your neighborhood and find one that fits your needs today.

Kelsey Heath

Kelsey Heath is a real estate content specialist with an extensive background in residential, industrial, and commercial property. She has been involved in the industry for a decade as a professional and personal investor, gaining a deep understanding of the market and trends. With a passion for written communication, Kelsey loves helping people understand the sometimes-complicated concepts behind real estate and is now a sought-out guest and ghostwriter.

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