Fair Market Value

What Is Fair Market Value?

In its simplest sense, fair market value (FMV) is the price an asset would sell for on the open market. Fair market value has come to represent the price of an asset under the following usual set of conditions: prospective buyers and sellers are reasonably knowledgeable about the asset, behaving in their own best interest, free of undue pressure to trade, and given a reasonable period for completing the transaction. Given these conditions, an asset’s fair market value should represent an accurate valuation or assessment of its worth. The term is commonly used in tax law and the real estate market.

Deeper Definition

The fair market value is the price an asset would sell for on the open market when certain conditions are met. The requirements are: the parties involved are aware of all the facts, are acting in their interest, are free of any pressure to buy or sell, and have ample time to make the decision. Both parties are not under duress in any way, but they are both knowledgeable about the transaction if it is sealed.

Fair market value is different than market value and appraised value. Tax settings and the real estate market are two areas that commonly use fair market value, and insurance companies use fair market value in determining certain claim payouts.

In litigation in many jurisdictions in the United States, the fair market value is determined at a hearing. In certain jurisdictions, the courts are required to hold fair market hearings, even if the borrowers or the guarantors of the loan waived their rights to such a hearing in the loan documents. We need to understand that there’s no third party; it’s simple: the buyer is willing to sell, and the seller is able and willing to buy.

Fair Market Value Example

The Smiths intend to move from the city to the countryside. Mr. Smith then approaches Rob, who has decided to sell his late father’s mansion. Both sat to discuss price, and they couldn’t come to a fair price, so they moved on to their next prospective buyer and seller respectively due to differences in valuation.