Fair Market Value Vs. Market Value Of A Home: Which Matters Most?

The value of a home is a fundamental part of selling, refinancing or borrowing against your home’s equity. It’s essential to properly assess a home’s value because it can significantly impact your finances for the long term.

So, how do you determine a home’s value exactly? Often, it’s by looking at the home’s fair market value and market value, two similar but different valuations that can help you collect beneficial data to protect your investment and avoid complications, especially during the closing process.

Let’s walk through the differences between fair market value and market value, consider why the differences matter and examine what you should look out for when evaluating a property.

What’s The Difference Between Fair Market Value, Market Value And Appraised Value?

The terms “fair market value,” “market value” and “appraised value” are often discussed in real estate for one main reason: to determine the value of a home. However, each uses a uniquely different method to find an answer. Depending on your situation as a buyer or seller, one value may be more beneficial than the other.

Fair Market Value

A fair market value (FMV) can be used for a home, business or any other type of asset. In real estate, this is a hypothetically determined price that a property should sell for in an open market. The numerical value here is based on what a buyer and seller would likely agree on in normal market conditions.

Fair market valuations serve as a starting point for a listing price if a seller hasn’t had their property undergo a home appraisal. This assessment is commonly used and often more accurate than a valuation largely driven by the current market.

Common Uses Of Fair Market Value (FMV)

Determining the fair market value of a home is a method used by buyers, sellers, and  homeowners looking to refinance. Here are some common scenarios where fair market value is a nifty tool:

• Selling or buying a home
• Calculating property taxes
• Dividing property among heirs in an estate matter
• Insuring a home or rebuilding a home after a disaster
• Determining real estate value for an investment portfolio
• Assessing home value during a legal dispute such as a bankruptcy or divorce

Market Value

Market value, by contrast, is the actual price at which a property will sell on the open market. This valuation method prioritizes the current supply and demand of the market and can be more volatile because home values can always fluctuate higher or lower. Market value very much depends on the amount of money that home buyers are willing to spend in the current housing market climate.

Appraised Value

A home appraisal is another valuation method, but in this case, a professional appraiser offers an independent assessment of a home’s value. The appraiser provides a determination of the value based on the home’s age, location and condition, along with the area’s current market data and comparable properties, or “comps,” nearby that have recently sold.

If the market value of a home shifts, the appraised value could shift along with it or stay mostly the same.

Fair Market Value Vs. Market Value Comparison Table

If you’re interested in buying or selling a home, you’ll often see “fair market value” and “market value” used interchangeably, but it’s important to know when and how to differentiate them.

Let’s take a look at a table of comparisons between fair market value and market value.

How To Determine A Fair Market Value (FMV) Of A Home

Knowing how a home’s fair market value is determined can help you better understand why the price point is what it is. This value is important if you plan to buy or sell, refinance or borrow against your home’s equity and determine its investment strength. Here are some factors you can evaluate to determine your home’s fair market value.

• Selling price: If the home has been recently bought or sold, this can play a role in fair market value. Selling price also depends partly on current market conditions.
• Comparable properties: A real estate agent can use data on recent sale prices of nearby homes in a competitive market analysis to determine your home’s fair market value. Numbers will increase based on features such as square footage, age, lot size and outdoor structures.
• Replacement cost: If the home was involved in a catastrophic event, the estimation of what it would cost to buy or build a similar property could be considered. This is often used when settling an insurance claim or tax return. Replacement cost is also used when numerous comps aren’t available to weigh against. Here, an appraiser or real estate agent will take the previous sale price of the lot and estimate construction costs to replace the home, factoring in depreciation and subtracting that from the value.
• Appraiser opinion: A professional appraiser can independently review the home’s value by considering its specific location, condition, amenities and other comparable property sales in the area. You can get a more accurate estimate by hiring multiple appraisers, but doing this can cost upward of a few hundred dollars.
• Property tax assessments: You can contact your local tax authority and request a copy of the property tax assessment for your home. Property taxes are often based on the fair market value of your home.

How A Home’s Market Value Is Determined

A home’s market price is mostly shaped by supply and demand in the real estate market. Being aware of market value is beneficial because it constantly changes. As a buyer, you might want to look at homes when supply is high and demand is low and there’s therefore less competition.

As a seller, on the other hand, you’ll want to consider putting your home on the market when supply is low, demand is high and you might get a higher price offer to profit from.

What Happens When A Home Is Incorrectly Valuated?

Both the seller and buyer in a home sale can be at a disadvantage if a home is valuated incorrectly. For buyers, it can mean paying more for a home than it’s really worth. Sellers, meanwhile, could have a less profitable outcome.

Consider the following reasons – including one we just touched on – why you wouldn’t want a home valued at the wrong price.

Missed Opportunities

If a buyer values a home much lower than the seller believes it’s worth, their offer may get rejected without the opportunity to negotiate. Before you can send a confident offer, it’s crucial to understand all the factors that go into the fair market value of a home. This way, you don’t risk losing your dream home simply because your bid was way too low.

The Buyer Overpays

Placing too high of a value on a home can cause a buyer to be “underwater” on their mortgage. This means you owe more money on the home than it’s worth, which can lead to a homeowner going through a short sale to avoid accruing debt and possibly facing foreclosure.

All in all, overpaying for a home isn’t worth the financial burden in the long run.

Appraisal Is Lower

Let’s say a buyer and seller have agreed on a price for a home sale. An appraiser still has to evaluate the property to determine the amount your lender will loan.

Even though these two amounts don’t have to be the same, a low appraisal will mean you have to pay the difference out of pocket or contribute a larger down payment if you decide to move forward. Either way, it can be difficult to secure financing if you agree to pay too much.

Which Value Matters The Most To Home Sellers?

While fair market value tends to matter more than market value in the grand scheme of things because it’s a more stable measure of a home’s worth, appraised value typically matters even more to sellers because it’s expertly evaluated on specific merits and deficits.

The most meaningful valuation method is always subject to change, however, depending on the situation, especially if you’re considering the best time to sell your house. In a seller’s market, more buyers might be willing to pay over the appraised value price to win a bidding war.

FAQs On Fair Market Value Vs. Market Value

Let’s take a look at some frequently asked questions on fair market value and market value of a home.

Is fair market value the same as market value?

Simply put: No, fair market value isn’t the same as market value. Fair market value and market value both focus on a property’s value price, but the way these methods establish their information is different.

What challenges could happen when evaluating FMV compared to market value?

When assessing the value of a home, people often confuse cost with value. For example, home renovations don’t necessarily add the same amount in value that they cost. Depending on the project, some home improvements done to increase value don’t have the impact of market-based factors such as living within a great school district.

When might a home not sell for fair market value?

In some situations, a homeowner might be compelled to sell their home below its fair market value. This sometimes happens when homeowners are unable to make their mortgage payments or they’re facing an expensive bill they need to pay.

How could a buyer’s market affect FMV?

If the real estate landscape is experiencing a buyer’s market, there’s typically a plentiful amount of housing inventory with little demand. As a result, houses are priced lower to help them well. Buyers frequently have the upper hand in this case and can negotiate more with the seller, especially after a home inspection is done.

If you’re a buyer, you should consider making an offer closest to the lowest valuation figure.

How could a seller’s market affect FMV?

During a seller’s market in real estate, there’s much less housing inventory for buyers, and this leads to more competition and higher prices. Usually, fair market value then inflates in price due to bidding wars. Being in this situation is highly advantageous for sellers because it allows them to sell their home for more than it’s worth and earn a profit. However, for the buyer, it could mean overpaying.

What are the tax implications of selling a house below market value?

Selling a property below market value will have federal tax consequences, under IRS rules. Consult a tax professional to figure out the full implications of this and the best course of action for your situation.

The Bottom Line: Determine The Best Value Of Your Property

Understanding the differences between fair market value and market value is key in the home buying process because, in the end, they both matter. To review: Fair market value is the value of a home sale estimation under normal market conditions, while market value is the price at which a home will actually sell based on current market conditions.

After considering the many moving parts involved in a real estate transaction, determine what’s most important and what you’re willing to agree on for a price compared to a home’s actual market value. Whether you’re looking to sell or buy a home, it’s essential to ensure you’re getting your money’s worth.

Are you ready to purchase your dream home at a dream price? Start the mortgage approval process today.