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Fair market value. You hear the expression all the time. But what is "fair market value" and how is this number determined?
The term "fair market value" generally means the price at which a seller will freely sell and a buyer will freely buy. A more technical definition -- and one with general application -- can be found in the state laws of Louisiana. The state's legal code explains that, "Fair Market Value is the price for property which would be agreed upon between a willing and informed buyer and a willing and informed seller under usual and ordinary circumstances; it shall be the highest price estimated in terms of money which property will bring if exposed for sale on the open market with reasonable time allowed to find a purchaser who is buying with knowledge of all the uses and purposes to which the property is best adapted and for which it can be legally used."
The dollar amount represented by fair market value becomes important in many cases.
- When a home is priced for sale.
- When an offer is made to buy property.
- When a home is taxed by local assessors.
- When a home is part of a divorce settlement.
- When a home is part of an estate.
- When the government wants to take your home through condemnation.
What makes the concept of a fair market value interesting is that different people may define this expression to mean a wide range of values. This is not surprising because many factors can play into creating a valuation including property location, age, lot size, local market demand, condition, financing, and related factors.
Where can you find information to help measure fair market values?
Your best choices are local brokers who are familiar with your area and appraisers.
Brokers can provide a "competitive market analysis" (CMA) that compares your property with recent sales as well as like homes currently on the market. Different brokers may produce differing valuations, so it's important to ask how figures were obtained. (It's not unreasonable for brokers to have differing opinions because market prices often fall within a range of values.)
Valuations are also available from appraisers. Appraisers are specialists who typically provide independent estimates of value for lenders, estates, insurance companies, and others.
Market values are important because if a property value is set too high it's likely to languish on the market. If the value is set too low then owners won't get full value. The same problems also impact buyers: If the property is over-valued you'll pay too much if you buy, if it's undervalued it will be quickly sold, perhaps before you get to it.
In addition to brokers and appraisers, other sources of general price information include local property tax offices, open houses, and newspaper ads. Such resources, however, may not be complete or up-to-date when compared with the information available from local brokers and appraisers.
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