What is a Fair Market Value of a House & How To Calculate It?

Fair Market Value (FMV) is a term you might be familiar with if you have considered selling your property, or any asset for that matter.

Understanding and determining the fair market value is essential in the decision-making process for both buying and selling such an expensive asset. The sellers need to know how to set their asking price, and the buyers need to know whether that’s a fair reflection of the asset - that’s before you even mention the mortgage companies.

So with quite a bit too it, let’s figure out exactly what Fair Market Value is and how you can calculate it, and what it can be used for.

Table of Contents

• What exactly does fair market value (FMV) of a home mean?

• How do you calculate the fair market value?

• What is fair market value used for?

• Fair market value vs actual value

• Is it ever worth selling below fair market value?

• FAQs

What exactly does fair market value (FMV) of a home mean?

In property, the fair market value is what a buyer is willing to purchase for on the open market (Rightmove, Zoopla & On The Market). This valuation should be what both buyer and seller would agree on for the transaction to take place, based on the knowledge of the property, market conditions, and there being no undue pressure to complete the transaction.

Understanding the FMV of a property is crucial to making an informed decision, but it’s also important to understand that fair market value is subjective and will differ person by person; it is merely to serve as a benchmark.

How do you calculate the fair market value?

We’ll start by saying it’s not an exact science, and pretty much everyone you speak to will have a slightly different opinion on the value of a property. There are several factors to include when trying to determine the market value of a property, and in this section, we’ll go through each one of them and then provide you with a step-by-step process to determine the fair market value of a property.

Sold Comparables

The most reliable piece of research you can do to get an idea of value is to look into comparables, which means looking at the value of very similar properties in the area. 

The mistake that people often make with this is focusing too much on the live market; the best comparables are those that have recently sold, because what people market their property for isn’t necessarily close to what they achieve and can be deceiving, setting unrealistic expectations of value.

Using tools like:

• Rightmove Sold House Prices

• Zoopla Sold House Prices

• Land Registry 

You can search the postcode of a property on any of these portals, and it will show you the house prices they sold for, including the date sold. The more recent and closer in condition and size to the subject property, the better. 

Condition

That brings us nicely into the next major factor, condition. This can have a significant influence on the price of the property, both increasing and decreasing. We’re not typically talking a fresh lick of paint, as that will likely help the appeal but the impact on actual value is minimal; it’s more the larger ticket items and required repairs.

• Bathrooms

• Kitchens 

• The roof

• Insulation & heating

• Modern appliances (smart heating, electric car chargers, solar panels and batteries)

All of these cost in the thousands to repair, and that’s something you should consider as a buyer or seller. It’s worth being aware, though, that just because a typical bathroom in the UK is £7,000 to replace, according to Checkatrade it doesn’t necessarily mean the property should have the value impacted by that amount.

What it does mean, though, is if that sold comparable property you are looking at has a nicer kitchen, bathroom, and the roof is in a better condition, then the fair market value of the subject property should be lower.   

It’s also worth noting that any major structural issues like subsidence have a huge effect on the property's value, but they may not be fully visible until there is a full survey is conducted. 

Condition is a huge factor on the swing of property value, our CEO, Jonathan Christie, remarked, “The condition of a property is probably one of the single biggest things that influences the value. Fair market value is essentially what a buyer is willing to pay for the property, and the condition has a huge influence on what kind of buyers you attract. 

A property in poor condition is likely to lend itself to those who are wanting a lower priced property and willing to put in the work to increase it’s value so it needs to be priced accordingly, but on the flip a property in a much better condition is likely to attract those that are comfortable within the price point and maybe more flexible.” 

Adjustments

It’s worth noting that a property may also have additions or adjustments to consider that could increase its value. From extensions to loft conversions, conservatories and everything in between, these will all add value to a property and are worth considering. 

How much they will add is really hard to determine, because it’s unlikely that sold house you’re looking at has the exact same adjustment or addition as the subject property. 

Again, it’s subjective, and it doesn’t take long to find out why. If you look into how much solar panels as an example, add to property, you will find figures ranging from 2% (Money Saving Expert) to as much as 25% (Admiral). 

Online valuation tools

As a reference point, you can use online house price calculators to determine how much a property may be worth. These tools are great for giving you an initial indication of what the property might be worth, as they use a collection of comparable data and insights, but they importantly don’t take into account condition.

Jessica Buckley, one of our authors, has written an in-depth article on these tools and gone into detail on the accuracy of online valuation tools as well as why you should use one. 

Consult experts

We would highly recommend that, whether you are a buyer or a seller, you contact as many experts as you can to give their opinion on value to help you build a bigger picture. 

Estate Agents - Walk into a few high street estate agents in the local area and ask what they think the property is worth. If you are a seller, they will be happy to share this as they may look to win your business, but even if you’re a buyer, they will often help, and even for a small fee, might look into it in more detail for you. 

House Buying Companies: Companies such as ourselves will value a property as part of our offering process. This is primarily a desktop valuation, in which we will rely on your opinion of condition and our expert interpretation of comparable properties.

RICs valuation - The most reliable

RICs valuations (Royal Institution of Chartered Surveyors) are considered to be by far the most reliable and valuable, which is primarily due to do with the strict standards and regulations that have to be adhered to. They are also completely impartial to both buyer and seller, so are in a good position to provide an accurate assessment of a property's fair value.

We use RICs accredited surveyors to provide valuations for properties we are purchasing.

Our Recommended Step-by-Step Fair Market Valuation

We’ve created this quick step-by-step guide on how you can determine the fair market valuation of a property quickly.

1. Check the sold house price comparables

Use multiple platforms to find properties in the nearby area that are similar in size, condition and sold recently, to determine the starting value.

2. Inspect the property's condition

Look into the main expensive parts of the property and their condition, factoring the cost for repairs and maintenance that may be required, and on the flip any upgrades it has which could add to the value.

3. Research the market conditions

The activity in the market is also worth looking at. How quickly are similar properties near the subject property selling? This can have a large influence on the price in line with the buyer's demand.

4. Seek external validation

Use as many external resources as you have access to, ask estate agents, call house buying companies, and even use online tools to get a good idea of the different price ranges.

5. Determine your valuation

Once you’re happy you’ve gained all the required information, determine your valuation of the property - remember, this is always going to be subjective.

What is fair market value used for?

The fair market value is used to determine an initial price for the property, as it is generally accepted that it will sell on the open market. This price will primarily be used to market the property on the likes of Rightmove or Zoopla,

Depending on the state of the market, whether it’s a buyer's or seller's market, the property could sell for above or below - it’s all about the supply and demand, and as much as you can take this into consideration during your research the market changes so often it can be hard to pinpoint.

Outside of the actual transaction itself, fair market value can be used for financing the purchase of a property, as it’s often something lenders wish to see and keep track of throughout the duration of funding (mortgage), as a means to assess their investment.

Fair market value vs actual value

We’ve stressed this repeatedly throughout the article, but the fair market value isn’t the actual value. The actual value of a property is what someone is willing to pay, and there can be so much subjectivity involved.

The market value can be correct, as per your research, but this doesn’t change the fact that someone else may have a different opinion or that market swings in buyer/seller demand could ultimately mean the property achieves a higher or lower price.

Is it ever worth selling below fair market value?

We’ll start by saying, we’re biased on this subject! 

As a quick cash buyer of property, and as a company, as you may expect, we do pay below market value. But we’re honest about this and our service from the start, and the true answer to the question is that it really depends on you and your circumstances. 

The value we offer is reflective of the fast service, we can buy property far quicker than your average buyer. It’s for exactly that reason that for some, it is worthwhile to sell below market value. If your circumstances dictate that a faster sale may be beneficial, then taking a slight reduction on market value is often worthwhile.

FAQs