In the world of real estate, there are so many different metrics and statistics that investors need to keep up with.
These statistics help investors make sure that they are optimizing their investments and keeping up with the financial market.
One of these important pieces of information is the market value of an investment.
The fair market value (FMV) is incredibly important when it comes to purchasing and selling real estate investments.
Below, we will be explaining everything there is to know about fair market value, as well as some useful tips.
What Is The Fair Market Rate?
The fair market rate or fair market value, also know as the open market valuation, is an educated opinion of what a property could sell for. Now, this number is based on a lot of things, including:
- Features of the property
- The state of the real estate market
- Supply and demand
- Market price of similar properties
…and some more.
This concept of fair market rate also refers to the market capitalization of a publicly-held entity. We will talk more about how to calculate this later in the article.
Now, you may have also heard of the term, market price. Although they sound similar, market values and market prices are two different things.
Below, we will explain the difference between the two.
Market Price vs. Market Value
As mentioned before, the market value definition is an estimate the price of a property based on various factors, similar to a company's market value.
On the other hand, the market price is the price that a willing and ready buyer will pay for a property. It is also based on the price that the seller is willing to sell it for.
When the property gets sold, the amount it gets sold for is what determines its market price. This, in turn also affects the market value.
So, we have talked quite a bit about what is market value and what the fair value is, but we don't really know where it comes from yet.
In the next section, we're going to explain some of the things that affect the fair market value before getting into how to calculate it.
What Affects The Fair Market Rate?
It's crucial to remember that the fair market value in your area may differ significantly from the national averages and can even vary greatly within the same area. There are several factors that influence a property's market value.
They are the physical location of the real estate, its facilities, size, and the number of bathrooms and bedrooms it has. Below, we take a closer look at each of these and its impact on the fair market values.
The Physical Location
Properties that are located in desirable areas generally have a higher fair market value than those in less desirable areas. This has a lot to do with its history of safety, its proximity to facilities such as schools and convenience stores, among others.
Owning a property in a more desirable area can earn you much more each month than similar properties located in less favorable areas.
Rental units that have been upgraded or improved have a better market price than those that have not. An example of this is having newly renovated roofs and ceilings in your property.
Since it has been upgraded, you can obtain higher prices for it. Other facilities such as access to outdoor play areas, gyms, and open spaces can fetch you more value than those that do not include such facilities.
The bigger the property or rental apartments according to square footage, the greater the earnings on the property. This means that even if the property is located in the same area as another smaller unit.
The Number of Bath and Bedrooms
Rental properties with a higher number of baths and bedrooms have a great market value, and landlords can charge more for buildings that include more baths and bedrooms even if the square footage is the same. An example of this is a two-bedroom apartment with two bathrooms. This may have a higher value than a one-bedroom unit with one bathroom.
Fair market rates are also influenced by demand.
Suppose there is a large number of people looking for a place to purchase. In that case, the fair market value is higher, whereas if there aren't that many people looking for rental buildings and there are several rental apartments on the market, the market value decreases.
So, now that we know about all of the different things that can affect the fair market value, let's talk about how to actually calculate it.
Calculating Fair Market Value
Since the fair market value is very vulnerable to market conditions, it can become very difficult to calculate. However, there are a few different ways in which you can calculate the book value of an investment property.
Selling A Property
As mentioned before, one way to calculate the rough fair market value of a property is by selling the property.
When the property is sold, the price that is agreed upon is often based on reasonable knowledge of the real estate market as well as local price trends.
Hire An Appraiser
Another way to calculate the fair market value of a rental property is by hiring an appraiser. Hiring an appraiser will help the seller reinforce their price with the buyer.
It is important to note that an appraisal is still a rough estimate of the value of an asset.
Comparing With Similar Properties
Another great way of estimating the fair market value is by comparing the property to nearby properties. You can do this by taking the square footage of nearby homes and dividing them by the price of the home.
Then, multiply that dollar amount by the square footage of your home. You have now roughly estimated the fair market value of your home.