Fair Market Value in Real Estate
What is Fair Market Value in Real Estate?
The fair market value of a Real Estate property is the value that a property would fetch if it was to be sold in the real estate market. The fair market value of a property must meet the following conditions:
- The buyer or seller of the property must have the necessary knowledge of the real estate investment in order to make a reasonable decision.
- The investors are acting in their own interests and without any undue pressure from any party.
- The transaction takes place within a reasonable period of time to allow either of the parties to conduct due diligence and make informed decisions.
The conditions above must be met when determining the fair market value of a property. If any of the conditions are not met, then the value obtained does not represent an accurate valuation of the value of the property. Getting an accurate property valuation involves gathering statistical data from similar properties with comparable features.
The main method for determining the fair market value is known as comparative market analysis. The comparative method involves taking at least five real estate properties in the same location, and that are similar to the investment property being evaluated. It uses the market prices of the comparable properties or prices of properties that are currently listed for sale in order to arrive at the fair market value.
To determine FMV, you can also consider real estate indices, such as the National Housing Bank’s (NHB’s) Residex, and two indices of the Reserve Bank of India (RBI)—Housing Price Index (HPI) and Residential Property Price Index (RPPI).
However, “There is no fixed formula to calculate FMV of a property. The technique most widely used to estimate FMV is to look at the sale instances of similar properties in the same neighborhood. The other option is to look at circle rates but there are a couple of problems in that too. Circle rates are usually lower than the prevailing market value.