Did you know that more than six million existing homes sales in the U.S. in 2021? With volume like that, it’s important to understand the market and price points.
One important figure you should know is the fair market value of a home, whether you are buying or selling. This term isn’t unique to real estate and understanding it can help you in many areas. Read on to learn more about what this means.
What Is Fair Market Value?
The fair market value of a home or other good is the price it would sell for if both the buyer and seller are acting in good faith and fully informed. While this definition may appear vague, there are more empirical ways to determine this value. The IRS has special definitions for fair market values in certain areas, such as estates and charities.
How To Determine Fair Market Value?
There are several methods for determining the fair market value of a home or other good. These include:
Cost or Selling Price
This is the price paid when the item was purchased or sold. If this wasn’t a recent transaction, then inflation is a factor.
Determining the cost to replace an item is another method. For a home, this would include labor and material costs, so this would require professional assistance.
As mentioned above, estimations are often needed when determining fair market values. A professional appraiser can review the property and factor in items like inflation and the local market.
These individuals often specialize and there are professional organizations that accredit them. Many states have licensing requirements for real estate appraisers.
Fair Market Value Tools
If you’re in the early stages of buying or selling and want to get a rough estimate of the fair market value, there are free tools available. Many banks and mortgage companies offer a fair market value calculator tool that can be accessed online. You can also access real estate websites, which lists the value of your home and others in the area.
Importance of Fair Market Value
Even if you aren’t considering buying or selling, the fair market value of a home or other good can impact you in several areas. These include:
The value of a home is a significant contributor to an individual’s net worth. Having the fair market value of a home allows you to accurately determine this figure.
When applying for a homeowner’s insurance policy, the insurance company bases this off of the fair market value. The higher the value, the more the owner pays in premiums.
This value is the basis for calculating how much you will pay in property taxes. Since this varies by state, you should check with the percentage that is applied where you live.
Fair Market Value Of Land
Fair market value can apply to more than just a home. The same process is used to determine how much is land worth. The same factors apply as with a home, with location being the greatest influencer.
Understanding Fair Market Value
Now that you know how to define fair market value, are you ready to determine the value of your possessions? If you’re just starting out, there are free tools available or you can seek professional assistance. This number can have an impact on what you pay in taxes and insurance so knowing it is important.
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