Procurement Glossary & Terminologies

Definition

Fair market value (FMV) is the amount a product would sell for on the open market if both the buyer and the seller acted in their best interests, were not subjected to excessive pressure, and were given a reasonable amount of time to complete the transaction. Given these circumstances, the fair market value of an asset ought to be a reliable estimation of its value.

Understanding Fair Market Value (FMV)

Since it takes into account the economic principles of free and open market activity, the phrase ""fair market value"" is purposefully different from terms like ""market value"" or ""appraised value."" On the other hand, the price of an asset in the market is referred to as market value. Consequently, while a home’s market value can be easily found on a listing, figuring out the fair market value is more challenging.

Similar to how ""appraised value"" only relates to an asset’s value in the eyes of one assessor, it does not automatically qualify as ""fair market value."" An appraisal will frequently be sufficient when a fair market value is required. Fair market values are sometimes used in taxation, such as determining a property’s fair market value for a tax deduction following a casualty loss.

Assessing Fair Market Value

There are four fundamental approaches to figuring out fair market value.

1. Cost or selling price: The price at which the object was purchased or sold lately can be a reliable predictor of its fair market worth.

2. Sales of comparable assets: One method of evaluating fair market value is when a real estate agent provides a potential house seller with a list of recent sales prices for similar surrounding homes. These comparable sales are known as comparables.

3. Replacement costs: These may be relevant when processing a tax return or resolving an insurance claim. It refers to the price incurred to purchase or construct a comparable asset.

4. Expert opinion: If you engage a professional appraiser to determine the worth of a piece of property, the resulting figure will reflect the fair market value, according to this expert.