A fair market value (FMV) is the price of a certain property, business, or asset on the open market set when the parties comply with the conditions. A seller and buyer should act in their own interests, be familiar with all the details about an asset, and not be subject to any pressure or influence.

A successful deal requires parties to enter the transaction on their own free will. For this purpose, a seller and buyer should be aware of the relevant information about a product (property, business, or another type of asset), behave in their own interest, have enough time to complete the deal, and don’t succumb to the influence of interested people.

In this article, we’ll uncover the importance of fair market value, find out how to determine it, and review the example.

Why is Fair Market Value Important?

When the conditions are met, parties can agree on a fair market value. It implies free and open market activity and can be often found in legal settings. It’s widely used by tax authorities and insurance companies. Tax authorities determine the amount of taxes based on this value and then collect them from the owners of certain assets.

Insurance companies utilize the value to insure their customers and to determine the refund amount in the event of an accident. When people make insurance claims, insurers know what sum of money to return if the insurance covers the case. For instance, if a person gets into a car accident, insurance compensates losses according to the vehicle’s FMV. In the real property setting, the value is widely used in divorce settlements to estimate compensation.

Now that you know about the importance of fair market value, let’s proceed to the next section to discuss how to assess FMV.

How to Determine Fair Market Value?

To spot the value, transacting parties follow several conditions. Firstly, an owner and a prospect should have all the necessary information about an asset that is up for sale. Secondly, it should be reliably known that both parties are acting in their own interests. Finally, a seller and a buyer ensure that the process is free from pressure. Utilize one of the fundamental ways to evaluate the FMV for your property, asset, or business.

  • Use the selling price. This approach is the most acceptable for assets or property that have recently been purchased or sold. This means that they haven’t yet managed to lose their original price and characteristics. In this case, the selling price will amount to the fair market value.
  • Take similar assets for comparison. When using this approach, consider comparables (assets that have similar characteristics to a subject property). If you want to sell a house, you can use the services of a real estate agent. This professional will provide you with a list of recent sales prices for similar houses in your area. As an alternative, you can also turn to other sources of information, like the internet to find out the approximate price.
  • Consider replacement cost. It refers to money one should spend to replace an asset, like property or business. The value depends on several factors (especially the market value of components of a property or business). The cost is often used by insurance companies to define the value of an insured item. Therefore, you can consider replacement costs when setting an insurance claim or a tax return.
  • Ask for an expert opinion. As an option, you can find a professional who will determine the value of your assets. The expert’s resulting figure will be your fair market value.

The methods to determine the value are clear now, so let’s see the example.

Fair Market Value Example

Let’s imagine that Oliver Brown who lives in Phoenix, Arizona wants to sell his house for $195,000. After checking on the relevant prices of similar houses in the area on the internet and consulting with an expert, Oliver decides to change the price to $225,000. After, the seller contacts a real estate agent to find a buyer and informs him that the new owner will have to change the bathtub since the old one has some problems.

The agent finds Emily Williams who is looking for a house in the area and the option fits perfectly. However, Emily has a budget of $210,000 for the house. After negotiations about the problem with the bathroom, the owner agrees to sell it for $210,000.

So, the FMV would be $210,000 and both the owner and buyer are informed about all facts, do it in their own interest, and agree on the price.

All in all, FMV allows sellers and buyers to set fair costs for their assets and ensure that the transacting parties do everything for their own good and voluntarily without any pressure. A seller during the selling process takes responsibility for reporting all the facts that may affect the price for a buyer, insurance company, or tax authorities.

Resources:

  1. This article defines the term and uncovers the significance of fair market value,
  2. In this article, the author reveals the use of fair market value.
  3. This article provides readers with the advantages of fair market value.
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