What is fair market value (FMV)?

One of the hardest parts about selling your home is landing on a sale price that you’re ultimately happy with. After all, you’ve been in the home since forever and poured your heart and soul (and dollars) into it. To you, it’s probably worth more than what most people are willing to pay for it.

So how do you determine a home’s worth for the purposes of selling it? The answer to this is finding out the home’s fair market value, or FMV, which is the amount people are willing to pay for your home. To accurately arrive at the FMV, the following conditions need to be met:

• The buyer and seller are both acting in their own best interests (buyer wants the lowest price, seller wants the highest price)

• The buyer and seller aren’t being affected by undue pressure to make the sale happen, such as time constraints or an intervening party

• The property is on the open market long enough for multiple parties to have a look; a home that’s only marketed to one buyer may not get you the possible sale price

Beyond just establishing the home’s sale price, fair market value plays a prominent role in a number of other areas, which we’ll touch on shortly.

Fair market value vs appraised value vs assessed value

In terms of what constitutes FMV, appraised value, and assessed value, there’s a lot of misinformation out there. All three valuations serve their own specific purpose and shouldn’t be conflated or mistaken for the other.

Fair market value

Your home’s fair market value is the amount that a knowledgeable and willing buyer would be willing to pay for it. Fair market value also assumes the home has been on the market long enough to receive multiple offers and that you haven’t been pressured into making the transaction.

It’s important to note that your home’s fair market value isn’t based on the following:

• How much your mortgage is

• How much Zillow says it’s worth

• The home’s sale price at the time you purchased it

• The amount you’re willing to

• The appraised value or the assessed value

Keep in mind that the appraised and assessed home value can help inform the home’s fair market value, but it isn’t the FMV. The FMV is dependent upon what the open market and buyer says it’s worth.

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Expect buyer’s to consider the following when determining your home’s worth:

• External characteristics like “curb appeal”, the lot size, the hipness of the home’s architectural style, the public utilities, sidewalks, and roads

• Internal characteristics like the size and number of rooms and bathrooms, the condition of home appliances, construction quality, square footage, heating type, energy efficiency or lack thereof, and so on

• The supply and demand in your area, meaning the number of homes versus the number of buyers

• Location and how close it is to reputable schools districts

Appraised value

As we’ve gone over, the appraised value can help inform your initial sale price, but it doesn’t constitute the home’s FMV. An appraised value is the home’s value as determined by an individual, licensed appraiser.

The appraisal value informs a number of mortgage processes. For example, your lender will require you to get an appraisal as part of the underwriting process when you’re applying for a mortgage. The appraisal helps lenders determine how much to loan you (along with your credit score and income).

Appraisals are also required by lenders to determine your equity position for processes like canceling private mortgage insurance (PMI), second mortgages, or mortgage refinancing.

You may be able to sell the home for exactly what it was appraised for, but more often than not that won’t be the case. You’ll sell your home for whatever the market deems it’s worth — not the appraised value.

Assessed value

The assessed value is a broad valuation of your home (and similar homes in your area) in order to determine how much you pay in property taxes.

Counties employ property tax assessors to find out each home’s value for tax purposes. Every county has its own tax assessment method, but typically homes of similar type and quality in the same area will be assessed the same property taxes. A tax assessor doesn’t enter your home and evaluate its construction or curb appeal like appraisers do.

Homes’ assessed values are public record and can typically be found online through your county’s property tax assessment database. However, like home appraisals, don’t mistake your home’s assessed value for its fair market value. Keep in mind that assessors assign broad valuations, so your home's assessed value could be off by hundreds of thousands of dollars.

How do I find my home’s fair market value?

In order to find your home’s fair market value, you’ll want to do a detailed sales comparison of what similar properties in your area currently sell for. Ideally, you’ll want to find sales information of at least three properties, according to the New York Department of Taxation and Finance. The department also suggests that you make sure these properties were sold under “normal conditions”.

The department suggests looking at the following characteristics when determining if the sold properties are comparable:

• The lot size

• Square footage

• Home style

• Age

• Location

If you’re struggling to find adequate comparisons, you can also look into getting an appraisal done. Appraisals are something else you can point to when convincing a buyer that your offer is fair.

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