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Fair Market Value
The price a property would sell for on the open market between a willing buyer and seller.
Definition
Fair market value (FMV) is the price at which a property would change hands between a willing buyer and a willing seller, both having reasonable knowledge of relevant facts and neither being under pressure to act. FMV is determined through appraisals using the sales comparison approach (comps), income approach (capitalized NOI), or cost approach (replacement cost minus depreciation). Lenders use FMV to determine the maximum loan amount based on LTV ratios. For investors, understanding the difference between FMV and investment value (based on your specific return requirements) is important — a property can be worth buying even if you pay FMV, as long as it meets your return targets.
Related Terms
Appraisal
A professional assessment of a property's market value, required by lenders before funding a loan.
Comparable Sales (Comps)
Recently sold properties similar in size, condition, and location used to determine a property's market value.
Cap Rate
The ratio of a property's net operating income to its market value, used to estimate return potential.
LTV (Loan-to-Value)
The ratio of a loan amount to the appraised value of the property.
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