“Fair market value” describes just how much any sort of land, including a house, is actually worth. The IRS, that came up with the term, defines fair market value as the cost the house would sell for on the open market. It’s guidelines for determining the value of a house without needing to really sell it.
Elements
Fair market value, according to the IRS, is the cost that could be negotiated between a buyer that don’t have any personal connection and a house seller. It’s the price that would be reached in a transaction in which neither party was coerced to participate — for instance, a”motivated” seller who desires cash immediately — and where both parties have equal access to information about the house. In property, such sales are called”arm’s length” transactions.
Significance
Fair market value determines how much a person could write off if she donates a house to charity, just how much in taxes a person will owe when he buys and sells homes as investments, and just how much the authorities must pay homeowners when it seizes their land via”eminent domain” for such things as parks or roads. It also points into determining the total value of a deceased person’s estate.
Factors
The IRS states an appraiser that is experienced can only determines the reasonable market value of property. Elements that go into the appraisal contain the size and location of the lot on which the house sits, the dimensions of the house itself, the status of the house, the standard of the area, the zoning of the surrounding region along with the prospective value of the property if used for something else.
Methods
The most typical way of determining the fair market value of property is to use comparable sales, or”comps.” With this procedure, the appraiser compares the house to properties of similar size and quality that have sold recently, adjusting the cost according to some elements which may increase or reduce the value of the house that is being appraised. For investment properties — for instance, homes the owner rents out — the appraiser takes into account the return on investment, or just how much income the property produces. Finally, an appraiser may try to compute”replacement value” — just how much it’d cost to construct the house new — and then subtract from any noticeable defects of the present structure. Often appraisers will utilize a combination of approaches to reach an estimate.
Consideration
Your house’s market value isn’t the same as its assessed value. The assessed value is the sum the government uses to compute property taxes on a house. The market value is usually higher than the value.