What is it? | How to calculate it | FMV vs. appraised value | Tax assessed value | FAQ | Why trust us
If you're buying, selling, or refinancing a property, one term you'll hear often is fair market value, a concept essential to making a smart move. Fair market value is the price a home would likely sell for on the open market between a willing buyer and seller, with both parties having reasonable knowledge of the property's condition and the current market.
In other words, it's what your home is truly worth, not just what you hope to get or what a website algorithm tells you. We'll walk you through what influences fair market value, how it's calculated, and how you can confidently find your home's fair market value today.
Determining fair market value is easier with the help of a real estate professional. Clever helps you find experienced agents in your area so you can ask them for a value assessment, with no obligation and no upfront costs. Take a quick quiz to find an agent now!
🔑 Key Takeaways:
- Fair Market Value (FMV) is the price a home would sell for under normal market conditions between informed, willing parties.
- FMV is different from appraised value, which is typically used for mortgage lending.
- Common ways to determine FMV include comps, appraisals, and online tools.
- FMV is influenced by location, condition, features, and market trends.
- There are also other valuation methods, like cost and income approaches, used in specific cases.
What is Fair Market Value in Real Estate?
Fair market value (FMV) is the price at which a property would be sold between a willing buyer and seller when both are reasonably educated about the property and the local real estate market.
To determine fair market value, real estate appraisers or agents use their expertise, recent home sales, market trends, and other inputs, including a number of home-specific factors.
Comparable home sales (also known as "comps") are one of the best ways to determine fair market value. Homes in desirable areas where properties are more or less uniform in terms of bedroom and bathroom count, condition, age, and style will be relatively easy to value because there should be plenty of comps that are relevant to the home being valued. Homes in areas where the market is slower and where homes are very different (in terms of size, age, and upgrades) will be more difficult to value because relevant comps will be harder to find.
Factors influencing the fair market value of a home
- Location: Proximity to amenities, schools, and employment hubs can increase value.
- Property size and features: Square footage, number of bedrooms/bathrooms, and unique features play a role in a home's value.
- Condition: Well-maintained homes typically have higher values.
- Comparable sales (comps): Similar recently sold homes in the area provide benchmarks for assessing value.
- Market conditions: Housing demand, local economic factors, and interest rates can all affect pricing.
How to Determine Fair Market Value of a Home
1. Get a comparative market analysis (CMA)
If you're serious about selling your home soon, request a CMA report from an agent to learn your home's fair market value.
A CMA is usually more accurate than online home value estimates for several reasons:
- A real estate agent pulls sales data from the multiple listing service (MLS), which contains the most accurate, up-to-date home sales information.
- Realtors hand-pick comparable home sales, unlike a home value website, which chooses sales based on an algorithm (and often chooses outdated or irrelevant sales).
- A real estate pro can give your home credit for any of its updates, renovations, or improvements, which a home value website may not be aware of.
We can match you with several local realtors, so you can request multiple CMA reports and compare the numbers for the most accurate fair market value estimate.
» LEARN: What is a CMA in Real Estate?
2. Order a professional appraisal
A licensed appraiser will assess a property's value by examining its condition, location, and (typically) comparable sales. Most of the time, appraisers use a similar method to what agents do for a CMA: They find the most comparable recently sold homes, adjust the values based on how the subject property is different from those homes, and land on a final value for the report.
However, appraisers will visit the home and walk through it, taking photographs and examining all of the major systems and features of the house to ensure that everything is in good working order and that the home doesn't need any repairs or changes in order to comply with local residential codes and guidelines.
An appraiser might also use other methods to determine the fair-market value of a home, depending on the home and the homeowner.
3. Use online valuation tools
Websites like Zillow, Redfin, and Realtor.com provide users with an automated valuation model (AVM), also known as a home value estimator, to calculate fair market value.
These sites are fast, free, and easy to use, and can help you determine a home's estimated fair market value within seconds. The sites rely on public data, such as a home's bedrooms, bathrooms, square footage, and recent area home sales, to calculate home values.
Home value websites are from perfect — even the best websites can be off by thousands of dollars. But if you're not ready to meet with an agent, they provide a useful alternative.
⚡ How much is my house worth? Get a free home value estimate for a real estate agent
4. Pay for a broker's price opinion (BPO)
A BPO is very similar to a CMA report or home appraisal. It's a home value estimate prepared by a real estate broker, based on your home's condition and comparable properties.
However, unlike a CMA report, a BPO usually isn't free ($150–$250). BPOs also tend to be less detailed and comprehensive than either a CMA or an appraisal.
A BPO could make sense if you plan on selling without a realtor, but still want a professional opinion of your home's fair market value (and don't mind paying for it).
Other Methods of Determining Fair-Market Value
While selecting comps is the most common way that appraisers determine fair market value, they do have other options for evaluating properties beyond comps, which they use for unique homes or income-generating properties, such as rentals.
Cost approach
The cost approach determines a property's value based on the expense to build an equivalent structure today, factoring in land value and depreciation.
This method involves three key steps:
- Estimate the cost to replace or reproduce the structure using current construction rates and materials.
- Subtract depreciation, which includes physical wear and tear, functional obsolescence, and external influences that reduce value.
- Add the value of the land as if it were vacant and available for its highest and best use.
This approach is most appropriate for:
- Newly constructed homes
- Special-use properties like schools or churches
- Homes with few comparable sales nearby
Although less common for traditional residential transactions, it offers a useful benchmark when market data is limited.
Income capitalization approach
The income approach, also known as income capitalization, is used to evaluate rental or investment properties based on the income they generate.
The formula for this method is:
Value = Net Operating Income (NOI) ÷ Capitalization Rate
- Net Operating Income (NOI) is the annual income generated by the property after operating expenses are deducted.
- The capitalization rate (cap rate) reflects the expected rate of return based on market conditions and investment risk.
This method helps investors determine what they should pay for a property to achieve their desired return. It's especially common in commercial real estate and multi-family housing, where income potential is a primary driver of value.
Fair-Market Value vs. Appraised Value
A home's appraised value and fair market value are not the same. Appraisal value is what a licensed, state-certified appraiser says it's worth based on the results of an appraisal.
Factors considered by an appraiser include:
- Your home's condition, size, and location.
- Upgrades, renovations, or improvements made to the property, such as a new kitchen or bathroom remodel.
- The condition of the home's major components, including its HVAC, roof, and foundation.
- Energy efficient additions like tankless water heaters, Energy Star-rated appliances, solar panels, and insulated windows.
In addition, appraisal value could be higher or lower than its fair market value. It's an objective valuation of a home by a professional, while fair market value is simply what a buyer is willing to pay for the property.
Unlike a home value estimator or a CMA report from a realtor, you have to pay for an appraisal ($350–$500), and the report can take a few days or longer to complete.
» LEARN: Should you get a pre-listing appraisal?
Fair-Market Value vs. Tax Assessed Value
Tax assessed value is not the same as its fair market value or appraisal value.
Tax assessed value determines a home's annual property taxes. A local county or city assessor values a home based on its location, condition, features, and the price of comparable homes.
Tax values often come in lower than a home's fair-market value, as it may be calculated as a percentage of the home's value. The actual percentage or calculation varies widely by location.
For example, an assessor may determine that a home's fair market value is $500,000. But if the area uses an assessment ratio of 90%, the home's tax assessed value would be $450,000.
Tax assessed values should only be used to help you plan for your potential tax bill, and should not be used to set a listing price or determine a fair offer price on a home.
Who Should Determine Fair-Market Value?
Understanding FMV is essential for:
- Sellers: To set competitive listing prices.
- Buyers: To make informed offers.
- Investors: To assess potential returns.
- Homeowners: For refinancing or property tax assessments.
FAQ
What does fair market value in real estate mean?
Fair market value is the price a buyer is willing to pay for a property in the current market. It considers location, condition, size, and market conditions. You can get an estimate of a home's fair value through online home value estimators, or a CMA report from a realtor.
Is fair market value the same thing as appraised value?
No. An appraisal value is a home's objective value determined by a licensed appraiser. A home's appraisal value is often higher or lower than its fair market value. For example, a buyer might be willing to pay $500,000 for a property, but an appraiser might think the home's fair value is lower than that based on the appraisal results.
How do you find a home's fair market value?
You can find a home's fair market value by running the property through online home value estimators, requesting a CMA report from a licensed real estate agent, or paying for a broker's price opinion (BPO) report. You can try to determine a home's value on your own, but it's best to enlist the help of a professional for a more accurate value.
Why you should trust us
Real Estate Witch’s mission is to provide accurate, actionable, and practical information you can use to make better decisions on your real estate journey.
About the author
Steve Nicastro is a real estate agent, investor, and personal finance writer based in South Carolina. He closed 19 transactions as a full-time agent between 2020-21, and helped numerous clients determine their home’s fair market value before setting an accurate listing price.
Steve has shadowed several top-producing agents in the Charleston, S.C. market, learning the ins-and-outs of the business – including how to complete a CMA report for an accurate price analysis.
Before writing for Real Estate Witch and working as an agent, Steve spent more than six years on NerdWallet’s content team as a personal finance writer. His work has published in USA Today, The New York Times, The Associated Press, and US News, among other publications.
Related reading
Best home value estimators ranked. What are the best home value estimator options? Read on to learn more about the best AVMs, such as Realtor.com, Zillow, and Redfin.
Redfin vs. Zillow home value accuracy compared. Which popular home value estimator provides users with the most accurate home values? We put each tool to the test.
What is a CMA in real estate? A CMA provides buyers and sellers with a home's fair market value. Learn what’s included in a CMA report, and how to get one for free.
Pre-listing appraisal: What you NEED to know. A home's fair market value should not be confused with its appraisal value. Learn more about pre-listing appraisals, and if you should get one before selling.