All the fun memories you have enjoyed in your home are priceless. But the house itself will get a certain price when you sell it, often based on its fair market value (FMV).
But what is fair market value? How is it determined? And how is it different from market value or appraised value?
Several factors determine the FMV and every property is different. Just like a puzzle has many pieces to see the entire picture. Your home’s fair market value is determined by many pieces of information, to see the total value when compared to other homes.
What is fair market value?
The Canada Revenue Agency defines fair market value as: “The highest price, expressed in terms of money, that a property would bring, in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.”
Meaning there’s no pressure to buy or sell the home and both sides have the same information about a property for making a sound financial decision. This would be considered a normal market and lacks the immediate need to act. Usually this gets you closer to the fair market value.
Fair market value represents the estimated amount of money a buyer and seller would likely agree upon through negotiations and under normal conditions.
When might a home not sell for fair market value?
There may be times when a home is sold above or below it’s fair market value. For example, a homeowner is facing an expensive family medical emergency. They can’t make their mortgage payment, or they need cash immediately to pay hospital bills. That is not a normal or typical selling condition. The homeowner might be compelled to sell the house below its fair market value.
Essentially, if either party is reacting to outside pressures — medical emergency, loss of a job, death in the family — while buying or selling a home, the home’s price point might drift away from its fair market value.
4 ways to determine your home’s fair market value
- Do your own market analysis but have realistic expectations
Make sure you’re doing a fair comparison to determine the best listing price. The asking price may not be the same price the house will sell for when the transaction is complete. Sold properties will give you a better indicator than listing price.
There could be other factors such as the market trends at the time a property sold, upgraded features, or being on a larger lot. These differences will affect the price even if you have the same exact square footage inside your house.
- Get more detail with a comparative market analysis (CMA)
Your real estate agent looks at everything that can impact your home’s value when they conduct a comparative market analysis. This includes your property with all its amenities, tax history, the recent sales of other nearby properties, the neighborhood, school district, and market activity for your postal code.
Make sure your agent gives you details on comparable properties. I recommend that you use an experienced agent who won’t use “superior comparables” of upgraded properties that sold for a higher amount. (shameless marketing plug for me here!)
If agent uses comparable properties that have granite countertops, hardwood floors and stainless steel appliances – and your property doesn’t have those same features – it could affect the true value of the property by boosting the price.
- Order a home appraisal for a second opinion about the value
If you want to do a deeper dive on the value of your property, paying for a pre-listing appraisal could provide the added details you need.
- A typical appraisal includes:
- A tour of your home and the property
- Reviewing the overall condition of the property
- Noting any obvious maintenance issues that affect value
- Taking in account any improvements that have been made
Don’t confuse appraisers with home inspectors. They won’t climb up on ladders to walk on your roof or crawl under your house. An appraiser’s analysis is based on what they observe about the condition of your home — they’re not looking for every little necessary repair.
How the appraisal process works:
An appraiser will compile their report based on observations from their visit along with using data from comparable properties. When you order a report from an appraiser, keep in mind this typically would be for your information only.
The buyer’s lender will usually hire their own independent appraiser per their financing guidelines. However, your appraisal can give you expert insights about the value of your home prior to the lender’s appraisal.
Yard work is not optional. If your grass is so tall the appraiser would disappear while looking at your property, it’s probably a good time to mow. You want them to be able to see your entire yard and not,
- Get a home inspection to find out more about what affects your value
Pretty much every house usually has $2,000-$3,000 worth of issues to address. Like a water heater being at the end of its service life. But it’s the bigger things like your roof or heating system that can really affect the total value and your buyer’s financing decisions. This is because the buyer wants to protect their investment. They will typically make a home inspection one of the conditions of the offer.
Those are 4 ways to get input into figuring out the “value” of you house. But what’s the real difference between fair market value, market value, and appraised value? What’s the impact in a buyer’s or seller’s market?
- Fair market value – Value of the home is based on normal market conditions, buyers and sellers are not overly eager to buy or sell a home and both parties have the same information.
- Market value – The home’s value is based more on the supply and demand of the market and can be more volatile as values can either be pressed high or low based on current conditions.
- Appraisal value – Your home’s value is reviewed independently by an appraiser who considers its specific location, condition, amenities, and other properties that are comparable to it.
What happens to Fair Market Value in a seller’s market?
During a seller’s market there’s limited inventory with high demand and prices are raised due to competition. This means that your house could sell for well above the fair market value because of bidding wars that inflate the price. A lot of times the buyer is going to have little to no leverage in regards to the negotiation.
What happens to Fair Market Value in a buyer’s market?
When you have a buyer’s market there’s lots of inventory with little demand and prices of homes are usually reduced to sell quickly. This typically means your house could sell for below fair market value since the buyer pool is smaller.
Bottom Line — discover your home’s fair market value
As you move forward with your home sale plans, remember that Fair Market Value is determined by many pieces of the real estate puzzle. It’s different from market value and appraised value — or a home’s selling price versus its estimated worth. When researching your home’s Fair Market Value, keep these tips in mind:
- Make sure comparable properties are equally matched
- Request a comparative market analysis
- Consider ordering an appraisal before pricing your property
- Schedule a home inspection and fix issues to help your sale
The best way to explore Fair Market Value in more detail is to work with an experienced real estate agent in your area. That would be me! (another shameless marketing plug)
Send me an email at firstname.lastname@example.org or call me at 613-769-6222.