Fair Market Value
Out of all the things in real estate, fair market value, or FMV, is a term that professional real estate professionals throw around a lot. If you are new to the real estate market, this is one term you should understand. Keep reading to learn more about fair market value in real estate and how to calculate it.
What is Fair Market Value?
Fair market value in real estate is the value of an asset that a seller would sell for on the open market to a willing buyer, neither being under any compulsion to buy or sell and both having an adequate understanding of the relevant facts. It’s important to note that fair market value is not necessarily the same as market value or appraised value.
Market value is what similar assets are currently selling for, while the appraised value is what an expert believes an investment is worth. Calculating fair market value can be tricky, but it’s essential to get it right if you’re looking to buy or sell an asset – especially an investment property.
How to Calculate Fair Market Value?
Calculating fair market value in real estate isn’t as simple as calculating the fair market value of other basic goods. You cannot just put some number in an already-designed formula and generate a result. Fair market value in real estate depends on the buyer, seller, and their understanding of the property.
Let’s consider what other elements in the context of income-producing property specifically multifamily residential may help in assessing fair market value:
You can analyze the current rent schedule and trailing 12-month profit and loss statement for the property to develop a cash flow projection for your desired hold period to help estimate fair market value.
Property stakeholders can utilize comparative market analysis. You compare the property in question with other similar properties that have recently sold in the market. You determine their selling price and corresponding capitalization rate (cap rate) and utilize to determine fair market value for the property in question.
Seek Professional Guidance
You could engage an MAI-certified appraiser to conduct an appraisal that outlines their opinion of fair market value.
What Affects Fair Market Value?
Some of the things that affect the fair market value of a property are:
The size and condition of the property significantly affect its fair market value. The size and condition of the apartment complex play a major role in determining fair market value.
Location matters quite a bit. A property in a location where rents are rising is generally worth more than a property in a location where rents are flat or decreasing. Further properties located with easy access to highways, rapid transit, and social facilities will have a higher fair market value than those that do not.
Similar properties in relatively the same condition and quality of location are good benchmarks that can be analyzed to help set the fair market value for the subject property.
If the subject property has recently sold it might provide insight into where fair market value is today.
The tax benefits a property offers can impact the fair market value in real estate. The more tax deduction opportunities a property offers a real estate stakeholder the more likely they are to set a higher fair market value.
How Does Fair Market Value Affect Investment Decisions?
Fair Market Value definitely affects investment decisions. Based on their belief of what is fair market value real estate stakeholders i.e. Buyers and Sellers, will act accordingly. Sellers are not going to pay more, and Buyers are not going to take less than what they believe is fair market value unless other personal factors dictate, they must, which is rare.
Fair Market Value: Conclusion
Assessing the fair market value of a property is important. By developing a high-level understanding of how to calculate the fair market value in real estate, will allow you to quickly assess and decide on whether to buy or sell a property.
Every property needs to be taken care of; it directly impacts fair market value. If you own multifamily property that is 75 units or larger and is looking for property management services please contact Summerfield Management, we have years of expertise in providing end-to-end property management solutions.
Fair Market Value: FAQs
Q. What does the IRS consider fair market value?
A: It is the price agreed upon between a willing Buyer and a willing Seller, with neither being obligated to act and both having reasonable awareness of the pertinent facts.
Q: What does fair market value represent?
A: When all things are considered equal it is the amount that a Seller is willing to accept and at least one Buyer is willing to pay for a property on the open market.
Q: What is the best way to determine your property’s fair market value?
A: Our recommendation is to either hire an MAI-certified appraiser to conduct an appraisal or engage an experienced multifamily real estate broker to conduct a broker opinion of value.