What is "Fair Market Value"?
In discussing the value of a property,
everyone thinks in terms of "fair market value".
Let's explore this expression, and see what it means insofar
as equating this type of evaluation to the price and value
of a property.
First and foremost, 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 assessed for Real Property
Tax purposes.
- When a home is part of a divorce settlement.
- When a home is part of an estate.
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 qualified professional 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.)
Qualified valuations are most usually available
from certified 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 is likely that it will
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 will pay too much if you
buy, if 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 your professional
appraiser.
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