Fair market value

Fair Market Value is a term in both law and accounting to describe an appraisal based on an estimate of what a buyer would pay a seller for any piece of property, assuming neither the seller nor the buyer is under any compulsion to complete such a transaction, and that the buyer has no special interest in the property. It is a common way of evaluating the value of property when assessing damages to be awarded for the loss of or damage to the property, generally in a claim under tort or a contract of insurance.

Fair market value is generally proved by expert evidence , although for commonly traded goods (such as new retail goods or negotiable securities) a court can take judicial notice of the price. Often, the fair market value is based on a date prior to the hearing that would establish damages, such as the date the property was destroyed, or the date of a separation when assessing the value of matrimonial property that is sold at a later date.

For example, if a used car is destroyed in a crash, the insurance policy will generally only pay for the fair market value of the car at the time of the accident. This can generally be determined by looking at Blue Book values, or the costs of buying similar vehicles being sold by used car dealers in the local area.

Generally, the less liquid and more unique a piece of property is, the harder it is to accurately determine its fair market value. For example, farm land is generally treated as a commodity and its fair market value can be determined with relative ease by comparing the sale prices of neighbouring properties. However, the fair market value of a unique property, such as the Empire State Building, would be difficult to determine as even other New York skyscrapers are rarely if ever sold on the open market.

Property taxation systems such as Market Value Assessment are generally based on the fair market value of the property.

Alternative pricing schemes, particularly for commercial properties, are Replacement Value , or what it would cost to re-build the building that exists on the site, or Commercial Value , based on the assumed rental income and the rate of return on capital investment for similar properties. These values can often give wildly different estimates than a fair market value approach.