What Is Fair Market Value?
Fair market value is what a house is expected to sell for. It’s based on a several factors, including how healthy the real estate market currently is and supply and demand at any given moment.
It’s important to understand that fair market value (FMV) is different than list price or appraised value. List price is the price a seller hopes to get for their home. It’s the number they advertise their property at when they put it up for sale. On the other hand, fair market value, is in simplest terms, an estimate on what buyers will be willing to pay for a home. It’s generally a first step in determining the listing price, and is usually a huge factor when sellers and agents come up with that magic number to list a house for. We’ll cover appraised value in a bit.
How is FMV Determined?
The fair market value of a house is determined a number of ways. In addition to the actual property itself, other market factors such as recently-sold properties in and around the area and supply and demand are both used to determine FMV. Fair market value is more susceptible to the ups and downs of the real estate market and economy.
A comparative market analysis (CMA) is an informal estimate of market value based on sales of comparable properties in and around the area. A CMA can be performed by anyone who is familiar with the area – this can include a broker or real estate agent, a seller or a homeowner.
What is Appraised Value?
Appraised value is an independent assessment of a property that determines a home’s value. This assessment is conducted by an appraiser. The appraisal value of a home is important to sellers and can also help determine what to list their home at. And it’s equally important to buyers, as lenders will most likely not approve a loan on a property that’s appraised at a value worth less than the asking price.
The appraised value of a home really can affect a potential buyer’s ability to obtain a loan to purchase the property. If the appraised value is much lower than the asking price, buyers may be required to come up with a larger down payment. On the flip side, if the appraised value comes in higher than the loan amount, the lender may be more likely to approve the loan.
How is Appraised Value Determined?
The appraised value of a property is determined by an appraiser. The appraiser is an unbiased, independent professional who assesses a home based on several factors. Appraisers look at a home’s condition and features, any improvements that have been made, lot size, landscaping, location, other nearby recent sales and other factors.
What is the Difference Between Fair Market Value and Appraised Value?
While FMV takes market factors such as supply and demand into account, appraised values are based on different criteria. More specifically, appraisals also consider a home’s geographic location, the features and condition of the home and recent sales of similar homes in an area. Because of this – while FMV of a home is more susceptible to the ups and downs of the market and economy, appraised values tend to be more consistent.
Who Determines Value
FMV is usually determined by a comparative market analysis (CMA) performed by a real estate agent or broker. A CMA is that less formal estimate of market value, based on sales of comparable properties. It can also be performed by a seller, homeowner or anyone else familiar with the market – regardless of licensure. The appraised value, however, must be determined by a licensed appraiser.
Which Number is More Important?
Fair market value vs appraised value isn’t really a “which is more important” issue. Both are important for varying reasons, and one often doesn’t trump the other.
Ultimately, in terms of importance, it depends on why the value is needed before you can rely on one number over the other. A higher appraised value is important, as it means a house will be easier to sell in terms of a buyer being able to secure a loan from a lender. But, a higher FMV number is equally important to a seller so they can get the most money for their home.
Instead of thinking about fair market value vs appraised value in terms of which is more important, it’s best to just become informed about the difference between the two values. As they say, knowledge is power, and if you’re looking to buy or sell real estate, the more power you have, the better.
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