What is fair market value of home?
If you’re looking to move, refinance or calculate the value of your equity, you might need to look into what your home is worth. Before deciding on a listing price, for example, you’ll need to calculate the fair market value of your home.
What is fair market value (FMV)?
Fair market value, or FMV, estimates the price of an asset on the open market. FMV might not reflect what you end up paying for a piece of property, but it gives all parties a general sense of what they can expect to be paid if the deal were to go through.
When reviewing the FMV of an asset, the indicated value is meant to reflect a rather straight-forward transaction. It represents the market value of an item, assuming a basic set of circumstances are true:
- All parties involved in the sale are knowledgeable about the asset.
- All parties involved in the sale are acting in their own best interest.
- All parties are free of undue pressure to complete the sale.
- A reasonable time frame is given to complete the transaction.
If one of the above isn’t true for your situation, the fair market value of your prospective home would likely be affected.
How do I find fair market value for a home?
Unlike the cost of a home loan, which can be estimated via a mortgage calculator, there is no direct formula for determining the fair market value for your property. Every home is a little different, with varying square footage, amenities and local home sales all affecting its price on the open market. Additionally, fluctuating interest rates can change the way homes are valued in a matter of days.
Cutting through the complexities of the many factors impacting FMV means making these estimations on a case-by-case basis. Despite the many variables, there are a few methods you can use for a rough estimate of your home’s FMV:
- Learn about the local market
- Hire an appraiser
- Calculate price per square foot
Learn about the local market
A great way to get an idea of your home’s fair market value is to do a bit of research on the local market. The sales price for nearby home purchases will likely fall within the same range as the FMV for your house. When appraisers are tasked to estimate an appropriate sales price for a home, they’ll always factor in local market trends.
As long as the square footage, property amenities and maintenance features don’t skew too far away from the norm, researching home sales in your area could be an easy means of estimating FMV.
Hire an appraiser
Appraisers are generally hired during the mortgage process to determine an appropriate sales price for a specific piece of property. While they can come up with a suitable FMV, appraisals are estimates based on one professional’s opinion. These estimates won’t be the final determining factor for your FMV, but could influence lenders when coming up with an appropriate loan amount.
Calculate price per square foot
Studying local home sales is once again useful when determining an appropriate price per square foot. Simply find a comparable home sale, divide that price by the home’s square footage, and you’ll have an approximate value.
You can then multiply that number by your own home’s square footage for a general idea of what the FMV would look like.
When is fair market value used?
When selling a home, owning a home or beginning the mortgage process, there are plenty of instances where fair market value can apply:
- Investments
- Taxes
- Homeowners insurance
Real estate
The importance of fair market value isn’t exclusive to the real estate industry. When trading stocks, bonds or other forms of equity, FMV is used to determine a suitable price.
When looking to start a new financial venture, it’s wise to compare the asking price for the product with its value on the open market. That way, you can be sure the amount you pay reflects the true value of an asset.
Taxes
There’s also a strong connection between the fair market value of your home and the way your property taxes are calculated. Your local government will establish their own tax rates according to the appraised value of the property.
For example, if the FMV of your home is $500,000, and the municipal tax rate is 5%, you would owe $15,000 each year in property taxes.
It’s worth noting that there’s often a gap between what the government tax assessor will assess as the value of a home and what a buyer is willing to pay for it. Government assessments are done every few years, which can mean that the assessed value of your home won’t always match up with its current market value.
Not only will fair market value impact your property taxes, but any deals or contracts involving the property will be taxed according to its FMV. Gifts, inheritance and estate taxes are all determined as a percentage of the asset’s value.
Even if you inherited a home, or were gifted a piece of property, you’ll still be responsible for covering the associated property taxes.
Before you agree to buy a home, or take on transactions involving real estate, it’s important to have a clear picture of the asset’s FMV and how it implicates your taxes down the line.
Homeowners insurance
Homeowners insurance provides financial protection against property damage or loss of personal belongings. In the event of a fire, for example, this type of insurance reimburses you for any necessary repair.
No matter what type of mortgage you apply for, lenders will usually require prospective homebuyers to provide proof of insurance coverage.
This coverage is retained through monthly premiums, paid by you as the homeowner. When deciding how much to charge for a policy, your provider will take a close look at your home’s FMV. They’ll decide your monthly insurance rates based on the “cost to replace the home,” which is usually determined by the FMV, rather than what you paid for the property.
Fair market value vs. appraised value
If you’ve ever had the experience of buying a home, you’ve probably dealt with appraisers in the past. When working out the terms of a mortgage, real estate appraisers conduct a thorough review of the property’s condition, amenities and whether the listed price of the home is appropriate.
Hiring an appraiser gives you an expert opinion on the value of your property. However, the appraisal report only reflects one professional’s opinion, so the number they bring back might vary.
In conclusion
Understanding the fair market value of your home and how it is calculated is an essential aspect of homeownership. Everything from property taxes, insurance premiums and the property’s future sales price are all determined by this value.
Keeping an eye on your FMV can also indicate when it’s the right time to sell or refinance your home. The best way to figure out your home’s FMV is to meet with a real estate professional who can provide an expert assessment of your home’s value.