Definition:
Fair Market Value (FMV) is the price a property would sell for on the open market when both the buyer and seller are willing, informed, and under no pressure to buy or sell.
Example:
Amy is selling her home. She and her real estate agent look at similar recently sold homes in the area, assess the property’s condition, and determine that $425,000 is its fair market value. A buyer agrees, and the home sells at that price.
Explanation:
Fair market value represents what a reasonable buyer would pay for a property, and what a reasonable seller would accept, based on current market conditions. It’s not based on what the owner originally paid or what they hope to make—it's about what the home is truly worth today.
FMV is used in many parts of a real estate transaction. Appraisers estimate FMV to help lenders decide how much to loan. Sellers use it to price their homes competitively, and buyers use it to decide how much to offer. FMV also plays a role in legal matters like taxes, divorces, inheritances, and insurance claims.
Several factors affect FMV, including location, property size and condition, recent sales of similar homes (called comparables or “comps”), and the current supply and demand in the market.
Why is Fair Market Value Important in Real Estate Transactions?
Fair market value is critical because it ensures that homes are priced appropriately—neither too high to scare off buyers nor too low to leave money on the table. For buyers, it helps avoid overpaying for a home. For sellers, it supports realistic pricing and a faster sale.
Understanding FMV creates trust between buyers and sellers and helps everyone involved make informed, confident decisions throughout the real estate transaction.