 Dear
Steve,
What is fair market value in real estate and how is it determined? Has this formula changed since the housing market fell?
-- Donna B.
 Dear
Donna,
In simple terms, fair market value is generally what a buyer is willing to pay for a property whose owner is not selling under duress -- a variation of that time-honored trading axiom, "what the market will bear."
Naturally, factors such as market demand, a home's condition and "location, location, location" play big roles in determining fair market value in residential real estate. Most real estate agents can calculate a reasonably accurate price based on "comps," short for a comparative (or competitive) market analysis. You can create your own "comps" based on information from your local property tax office and perusal of Internet and newspaper sale ads, but this strategy probably won't give you as accurate a picture as actual recent neighborhood sales in your price and size range.
City and county tax assessors, not surprisingly, tend to abide by the notion that the higher-priced recorded sales best represent true market value, while those lower-priced sales probably represent distressed sales. However, this is an inexact science that often results in higher assessments and tax protests by homeowners.
The Supreme Court defined fair market value in the 1973 case, United States vs. Cartwright, 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." Some states have legal codes that present more refined (and longer-winded) definitions.
It's important to note that value opinions are based on the subjective interpretation of available information, in contrast to imposed market values, which can set by the IRS or by legal action such as eminent domain. With the IRS, fair market value of real estate can be a very important consideration. For example, if you were to sell your home to your daughter for a sum that's considerably under local comps, the difference between that reduced price and what the IRS considers fair market value will be treated as a gift for tax purposes.
To answer your other question, the method of calculating fair market value should not change with a down market, at least hypothetically. But in reality, there are so many homes sold at auction and foreclosure in distressed sales that such transactions are no longer the anomalies they were a few years ago. Hence, these sales results almost have to be factored in with conventional sales to reflect a true aggregate market standard from a marketing and taxing perspective, at least in my opinion.
In other words, fair-market values are probably lower than estimated at this bottom stage in the real estate cycle. As is true with any asset, its real value is determined by what someone is willing to pay for it, not its list or assessed price.
|
