Fair market value is a price that a seller and a buyer would agree on according to a few basic notion that involves knowing essential facts of the market state as well as a value of the house at a given time.
The house’s value and price may not reflect the current real estate market price, and vice versa.
Conversely, what a seller and a buyer agree on may not reflect the house’s value nor the current market price.
Several factors may influence this. Thus, commonly, a listing achieved a fair market value if it fulfills three conditions which are; the transaction is “at arm’s length”, both parties are not under pressure, and both sellers and buyers are knowledgeable of the current market state.
Transaction is at arm’s length
Buying from family members or a close friend, for example, is not transaction that is done at arm’s length. The close relation more often than not, greatly influence the price of the house.
Buying a house from a complete stranger is different from buying the house from your aunt, for instance.
Both parties are not under pressure
There are certain pressure that may influence the closing of a deal. Some of the most common one is if the seller is under pressure of selling the house fast because of a relocation.
There is also a case when the buyer is pressed for a purchase, or if the buyer has no idea about the market price.
Both are knowledgeable of the market
Parties involved in selling the real estate have a fair idea of how the market is fairing at the moment of their communication or transaction.
Ideally, both parties would be knowledgeable of the market in the area, or have access to accurate information. This is a bit difficult for buyers to access, however, not impossible.
It can be done by enlisting the help of neighborhood specialist. Doing research by yourself also often proved to be fruitful.
The appraisal value depends on several factors, in which the appraisal is done by a licensed appraiser, commonly from an appraisal management company. The most important things are commonly the most basic ones that are affixed to the house.
An appraiser would also compare the price with at least 3 houses recently sold in the area.
When the market is “hot” the price would typically be higher. And would continue to remain so for as long as the market remain “heated”. When the market is “cold” the price would commonly decrease.
The low price of the house during the depressed period reflects the current pricing and not the future value of the house when the buyer decides to resell, and the opposite applies.