What is Fair Market Value (FMV)?
Short Answer
Fair Market Value (FMV) assumes that a buyer and seller are aware of the facts and that the price in which the property exchanges for is not the result of a forced sale. Note that Fair Market Value is not the same as Fair Value utilized by a banker, bank examiners or accountants.
Definition
According to IRS Regulation §20.2031-1, which is also included in the Dictionary of Real Estate Appraisal, Fifth Edition, published by the Appraisal Institute (Chicago: Appraisal Institute, 2010) Fair Market Value (FMV) is defined as:
“The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.”
What it Means
Fair Market Value is very similar to market value. In fact, some argue that they are identical. Within the context of appraisal, Fair Market Value generally means that the value established as a result of the appraisal is not a factor of an undue stimulus, both the hypothetical buyer and seller are motivated to a degree comparable to other market participants, and that buyer and seller are aware of publicly known or discoverable facts relating to the subject property, market, comparable properties/opportunities, etc.
Fair Market Value (FMV) vs. Market Value
The main reason to use Fair Market Value as opposed to Market Value is if the appraisal is related to a requirement to use this definition per the assignment parameters, IRS related issues (including estate settlement), or similar context wherein strict adherence to the definition of Fair Market Value is required. In many cases, courts prefer the use of Fair Market Value. Other instances would be if a private or public agreement called for a value to be based on the Fair Market Value of the property.
From a real estate appraisal standpoint, FMV is most similar to “As is” Market Value for most situations. This could differ for complex valuation scenarios. In most cases, FMV should take into account actual, “As is” features of the property.
“Fair Market Value” vs “Fair Value”
Fair Market Value may not have the same definition to regulated lenders, accountants and bank examiners seeking “Fair Value”.
Fair Value can be defined as the title of a value used by bank examiners to determine loan losses, reserves or impairment. In this case, Fair Value is an accounting term, not an appraisal term. There is more than one definition of Fair Value in FASB accounting standards (used by all lenders, accountants and public companies as well as IRS.
If a non-licensed/certificated person (such as an examiner) is offering an opinion of Fair Value in lending for the purpose of identifying losses etc. in a bank environment, they are advised that Fair Market Value is not the same thing.
The distinction between Fair Market Value and Fair Value becomes an issue for an accountant, a banker or a bank examiner.
Related Topics
Refer to our Value Vault resource section for additional appraisal definitions and appraisal related topics.
