In real estate terms, a fair market value is the price at which a property would likely sell for on the real estate market. It is determined by a property valuation.
The fair market value service as the basis for real estate price negotiations. That is why property sellers typically order valuations before putting their properties on the market.
A property’s fair market value should not to be confused with its selling price. The price at which a property is sold is the result of price negotiations, and can be higher or lower than the fair market value. The price at which a property is sold has no influence on its fair market value.
Fair market value also plays an important role in mortgages. The lender (normally a bank) calculates the size of the mortgage based on the property’s collateral value. This is only the same as the selling price when a property is sold for less than its fair market value. On the other hand, if you pay more than the fair market value when you buy a property, that will have an impact on the size of your required down payment.
Example: You get a mortgage for a property which has a fair market value of 1 million francs. You have to pay 20 percent of the collateral value as a down payment. So the biggest mortgage you can get is 800,000 francs, and you have to pay a 200,000-franc down payment out of your own pocket. But if you were to pay 1.1 million francs – or 100,000 francs more than the property’s fair market value – the fair market value would still be 1 million francs. So in order to buy the property and get the mortgage, you would have to pay a 300,000-franc down payment instead of 200,000 francs.
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