What does fair market value refer to?

Fair market value refers to the price a property would sell for in a competitive and open market, where both the buyer and seller are knowledgeable about the property and neither is under any compulsion to buy or sell. This concept assumes that the transaction takes place in a market environment where adequate exposure and time have allowed for both parties to make informed decisions.

In contrast, the purchase price paid for a property does not always equate to fair market value, as it can be influenced by unique circumstances, negotiations, or market distortions. An estimate provided by a property seller is often subjective and may not accurately reflect the true market conditions at the time of sale. Similarly, a value set by a seller's real estate agent is typically based on their professional judgment and may include biases or personal interests that could skew the true market value.

Understanding fair market value is essential for both buyers and sellers, as it provides a benchmark for assessing the worth of a property in a given market.