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What is Fair Market Value?

Tricia Christensen
Tricia Christensen
Tricia Christensen
Tricia Christensen

Fair market value is a term that may be used in a variety of contexts. It might apply to the price of a home, car, or other property, and it can be used in legal ways, for taxation, or by insurance companies to determine the current worth of something. This worth does not take into account personal valuation of property. The fact that a person really likes a home has little to do with this number. Instead, it mainly refers to the monetary worth of the property if sold presently, when the sale is not rushed and prices of the property aren’t reduced for quick sale.

Another way of defining this is to look at what price a home, car or other property would currently fetch on the open market. This is the value typically assigned to the property by other agencies. If a car crashes and is so damaged that repairing it would exceed its fair market value, an insurance company will typically offer that value instead of repairing the car. This is not the same as price of replacing the car — a used car that's not worth much isn’t going to garner enough in replacement money to buy a new one.

Fair market value of real estate can be used to calculate property taxes.
Fair market value of real estate can be used to calculate property taxes.

Similar valuations may be done for insurance purposes when people lose items in disasters or accidents. A person who insures the contents of his home may receive some money back for these things, but usually not enough to fully replace them. There are some insurance companies that don’t insure on this basis, but instead insure on the basis of cost of replacement, which is typically higher.

An insurance company may offer a car's market value instead of repairing a car that has been involved in a major crash.
An insurance company may offer a car's market value instead of repairing a car that has been involved in a major crash.

There can be a number of different formulas used to determine fair market value. The IRS, for example, has formulas for determining how to deduct value of donations of certain items from taxes. The value of used furniture that is still in reasonable condition, for example, might be approximately 15% of the original purchase price. On the other hand, if the furniture is antique, a person who donates it could have it appraised by an antique dealer first to determine its market value.

Fair market value may also be applied to homes to show why property taxes should be lower. When homes would fetch a much lower price on the open market, people can argue that they owe a smaller amount. On the other hand, if the value of a home increases significantly, property taxes could be raised, based on the higher price it would likely get if it were sold.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent WiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent WiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Learn more...

Discussion Comments

Bhutan

Mutsy- I agree with you. I have a friend in Florida that could not get a mortgage for a condo that she wanted to buy because the bank said that it could not assess the fair market value of the property because there was a high amount of foreclosures in the building.

This also happens when a buyer and seller agree on a price but the bank’s appraiser sets the property at a lower price than was originally agreed upon by both parties. In this case, the bank would only loan money to the buyer for the amount that the bank deems is the fair valuation.

This is especially frustrating in short sale transaction when the short sale price is artificially low. Many banks will still reject the agreed upon price and the seller then needs to find a new buyer.

mutsy

I just want to add that determining the fair market value of a home is a little tricky. Many homes are difficult to appraise when the real estate market is so volitle.

Often a surge in foreclosures lowers the fair market value of a home even if it is not in foreclosure.

This poses a problem for a regular homeowner since property taxes are based on set on the fair market value of the home.

The city had a formula that automatically increases the property taxes by three percent of last year’s bill, but if the fair market value is depressed and the predominate sales of homes are coming from foreclosed properties then a special condition may apply.

This situation happened in South Florida and the tax rolls were adjusted to reflect the average selling price of the homes being sold on the market.

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    • Fair market value of real estate can be used to calculate property taxes.
      By: emiliezhang
      Fair market value of real estate can be used to calculate property taxes.
    • An insurance company may offer a car's market value instead of repairing a car that has been involved in a major crash.
      By: vvoe
      An insurance company may offer a car's market value instead of repairing a car that has been involved in a major crash.