What is Fair Market Value?

Asked by Debra B Albert PA, Port St Lucie, FL Sun Jan 23, 2011

You often hear that you should offer fair market value on a house that you want to buy. What is it?

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Don Tepper, Agent, Burke, VA
Sun Jan 23, 2011
Karen and Bill have provided the traditional, accepted answers. And they're pretty much on target. Being the contrarian that I am, though, let me offer a somewhat different definition:

Fair Market Value is the most that an average buyer who is well-informed as to market conditions will pay for a home.

Let's dissect that.

"Average" buyer: One with average motivation and needs. Everyone's different, of course. But we really need to rule out people who are desperate to buy for whatever reason. Try to look at the market--the entire pool of buyers--to determine fair market value. Remember: We're talking "market" here. Example: Suppose 100 people go into a supermarket to buy cans of tuna fish. Most would be willing to spend, say, $1 per can. But now you have someone who absolutely needs tuna fish. It's for a special meal he/she is making and guest are arriving in an hour. How much will that shopper be willing to pay? $2? $3? $4? Although that shopper is willing to pay a lot more, the fair market value is still only $1.

"Well-informed." It's not enough that a buyer and seller agree on a price. A house may be worth (based on comps, and based on what an appraiser may determine) $200,000. But let's say a buyer, unfamiliar with the area is willing to pay a lot more. ($200,000 may not buy much in the Washington, D.C., area, but it might buy a really nice house in the Midwest, for instance.) So our D.C.-based buyer offers $200,000 for a home in the Midwest that's only worth $100,000. The seller happily agrees. Even though they've agreed on $200,000, the fair market value is still only $100,000.

On the flip side, investors make a lot of money (sometimes) by paying under market value. Often/usually, the seller is fully aware of what the supposed "market value" is. But for many reasons, the seller is willing to accept less in order to get a certain, quick, cash sale. Assume, again, that a house has a "fair market value" of $200,000. But it doesn't show well. The seller owns the home free and clear, and the seller isn't interested in spending money to fix the place up. So the seller--with full knowledge of value and market conditions--is willing to sell the property as is for $130,000. Those identical houses on either side of the property haven't just dropped $70,000 or more in value. (Though Karen's correct that the lower sales price will affect comps and probably will depress the supposed value if an appraisal is done.)

So, while an individual buyer and individual seller may agree on nearly any price for a property, I'd say Fair Market Value must have a firmer basis than that.

One other note: I'd disagree with your premise "that you should offer fair market value on a house you want to buy." I'd say: "Never pay more than fair market value." Quick example: A house has a Fair Market Value of $200,000. The sellers have priced it at $225,000 to give themselves a bit of negotiating room and because they want every penny they can get from the sale. Happens all the time. So, if a buyer comes in and offers $200,000, what are the sellers likely to do? Very possibly they'll counter at, let's say, $210,000. And then the buyers either accept $210,000, or they counter at, say, $208,000. But see what's happened? By offering fair market value on a house that's priced above FMV, they're very likely to overpay. Maybe a little. Maybe a lot.

Hope that helps.
1 vote
Janet Sebile, Agent, Rowlett, TX
Sun Jan 23, 2011
Ron and Debbie,

Fair market value is defined in real estate terms as the highest price that a buyer is willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.

With that said, keep in mind that each home owner has a different reason for selling and as such some are more willing to negotiate a sales price more favorable to the buyer. It definitely depends on what is happening the market at the time the buyer is seeking to purchase.
1 vote
Ray And Karen…, Agent, Mount Dora, FL
Sun Jan 23, 2011
Ron,

That's a question that is very interesting.

FMV is what sellers and buyers agree to pay for properties since they become comps and are used in future evaluations.

It's certainly a moving target.
1 vote
Bill Eckler, Agent, Venice, FL
Sun Jan 23, 2011
Fair market value is theoretically, the highest price a buyer is willing to pay and the lowest price a seller is willing to sell the subject property for. This is assuming that there are no outside factors that control or impact either parties interests.

With this said, the question becomes: should short sales and foreclosures be considered undue stimuli for a given neighborhood.

Respectfully,

Bill
1 vote
gabriel palo…, Agent, Pompano Beach, FL
Tue Nov 1, 2011
Faire Market is paying less than the asking price when you buy iit and selling it for double in 30 days without a realtor.
0 votes
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