Fair Market Value: What Is It & Why Does It Matter?

We all have heard the term Fair Market Value (FMV) , but what is it, specifically? FMV can be defined as, “an estimate of the market value of a property, based on what a knowledgable, willing and unpressured buyer would probably pay to a knowledgable, willing and unpressured seller in the real estate market.” If you ask three people the value of a property, you will most likely get three different answers. This elusive number is what will make or break an investor purchase from great to totally under water. To calculate the FMV, we’re going to use comparables, or “comps.” Comps tell you what similar houses in the same geographic area have sold for in the past. The easiest way to run comps is through one of many real estate software packages. If you don’t have access yourself to software or services that can give you reliable comps, you can get help from a Realtor (you should already have a Realtor you trust in your network). Since Realtors tend to estimate property values on the high side, make sure to get a printout with your criteria. Remember, it is not the high comps we are most concerned with, but what the low-end comps are. This is the number we want to focus on in case of a worst case scenario situation. In order to run useful comps and generate an accurate picture of what is trending in an area, there are some specifics you will want to pay attention to:
  • The number of bedrooms.
  • The number of bathrooms.
  • The square footage of the house.
  • The year the house was built.
Search for all the homes that have sold in the area within the past year with the exact same number of beds and baths, built around the same time and with similar square footage to your target home. Make sure that the area you’re searching is in the same school district and has similar homes. Look for any sales numbers that seem out of place (very high or very low) and double check to see if you’ve included a geographical area that might be unique, like a cluster of condos or even a trailer park. I research the development or street rather than just using a generic distance search such as 1/4 -1/2 mile radius. This is when it’s really important to know the area you’re buying in. Most importantly, stick to these numbers and always err on the side of caution. Remember that a home priced to sell is going to be closer to the low-end comps, so make your calculations with this number in mind.
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