Fair Market Value

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on January 05, 2023

Fair market value is the price, determined by the open market or by an appraisal, that a property would sell for if it were offered to and sold by one person to another without any undue influence.

It is important to understand how fair market value affects your investments because this amount will determine whether you are paying too much for your investment.

Why Does It Matter?

If you are investing in real estate, the price set for a property impacts your investment decision and how much money you can make off of this. 

The fair market value will determine whether or not you overpaid for the properties that you bought. This number tells you how much the property is worth and if it is priced correctly.

To have a successful investment, you need to know whether or not the property is being priced correctly. If it has been overpriced, then there will be no profit for your investments, and if it has been undervalued, the chances are that someone else may get this opportunity before you do. Since fair market value impacts your investments, it is crucial to be able to calculate this number accurately.

How Is It Calculated?

There are several different ways to determine fair market value. To get an accurate assessment, you have to have all the required information to determine the price.

Market Approach

This approach is the most common way to determine fair market value.

This method involves using analysis of recently sold properties to get a good idea of what these assets were worth according to the open market.

The prices that are set for these comparable items will indicate how much this asset should be priced at as well.

Income Approach

This pricing strategy takes the future cash flow and determines what it is worth at present.

This method involves projecting income that will come into this particular asset over time to see if its value matches up with your expectations or not. If it does, you can invest in the properties because there are good chances to increase in value.

Cost Approach

This strategy is used to determine value by looking at the cost required for creating this asset.

This method will look at how much it costs to create a property and see if its sale price matches up with what you have projected or not. If it does, then there are good chances of the investment being profitable as well.

Expert Opinion

This is a method that involves getting expert opinions to determine the value.

This approach will require you to get an appraisal done by someone who knows what they are doing and has experience with this pricing strategy. 

You can then compare your findings with theirs to see if there are any discrepancies or not, which would indicate whether or not you need to adjust your plans and if their appraisal is accurate or not.

Uses of Fair Market Value

For home buyers, if you are looking to buy a house, this property's price will determine how much money you need for your down payment and whether or not it is worth investing in.

The fair market value determines if there is enough equity in the property to be used as collateral for other loans such as mortgages. For home sellers, if you are selling your property, the fair market value determines how much money you will earn from your investment.

This price is also used to determine whether or not there is enough equity in this particular asset that can be used as collateral for other loans such as mortgages.

Final Thoughts

By knowing how the fair market value works, it will be easy for you to make a good investment decision about whether these properties are worth investing in or not. 

With this information, you will be able to find out what the right price is and at which point you can make a good profit from your investment.


Fair Market Value FAQs

What is fair market value?

It's the price that an asset can be sold for in a perfectly competitive and open market, with both buyer and seller having access to all the relevant information.

Why does fair market value matter?

It can be used to determine whether or not a particular investment is worth it. If the fair market value of an asset meets your expectations, then you know that there are good chances for this investment to increase in value. If the price doesn't meet your standards, then it means that you should look elsewhere and invest in something else instead because this one is not worth it.

How is fair market value determined?

There are numerous methods used to determine the fair market value of an asset. Some of them include market approach, income approach, cost approach, and expert opinion. The market approach involves looking at how much similar assets have been valued to get a good indication of what your asset should be valued for. The income approach calculates the current value of property by looking at how much money it can generate in the future, which is then discounted back to see what it is worth today. The cost approach involves calculating how much it would cost to construct an asset and seeing if its sale price matches the cost. Expert opinion is often used for property pricing, where an appraiser or someone who knows what they are doing will come in and determine the value of your asset by looking at comparable properties nearby.

Is fair market value the same as an appraisal?

An appraisal is a method used to determine the value of an asset. It's different from fair market value because FVM is how much your asset can be sold for in a perfectly competitive and open market.

Where is the fair value market used?

The fair market value can be used for many different things. For example, it is often the starting point of negotiations between a buyer and seller during real estate transactions because they use this price to determine their next move for them to get what they are looking for based on how much money they have available. It's also used by investors who want to invest in properties. By knowing what the fair market value is, they can get a good idea of how much money they need and if their plans will succeed or not.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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