The fair market value (FMV) is the price settled between a buyer and a seller for a specific asset. Both the parties should be aware of the asset’s condition and must be willing to participate in the transaction with no force or conditions. Therefore, the fair market value represents the amount for which a property would ordinarily sell in the open market if put up on sale.
The Indian Accounting Standard (AS) 113 defines fair value as the price that will be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the date of assessment. The amount that a given property or asset would fetch in the marketplace is subject to the following conditions:
1. Prospective buyers and sellers are relatively knowledgeable about the asset; they are behaving in their own most genuine interests and are free of undue pressure to trade.
2. A reasonable time is given for the transaction to be completed.
Provided these conditions, Fair Market Value of an asset should represent an accurate valuation or assessment of its worth. Municipal property taxes are generally assessed depending on the FMV of the owner's property. The longer the period of ownership of the property, the more significant can the difference between the purchase price and the property's FMV will be. Professionals use standards, guidelines, and local and national regulations to determine a home's FMV.
Factors affecting Fair Market Value of a property -
1. Location – The location of a property is a major determinant of the property value. If the property is situated in a prime area, it obtains the first estimate. Excellent location refers to the heart of the city or an area having upscale buildings and residential areas including sprawling apartments. Ex - MG Road in Bangalore and CP in Delhi. On the contrary, properties located in remote areas or outskirts are estimated at a lower value.
2. The site - The dimensions of property play a significant role in its evaluating the Fair Market Value, be it a plot, flat or an independent villa. A bigger parcel of land will retain more substantial value as compared to a smaller one.
3. Demand and supply – The demand-supply dynamics of property, too, impact the Fair Market Value. Higher demand unmet by insufficient supply is bound to surge the FMV, whereas, oversupply hinders capital appreciation. Various other factors such as easy access to home loans, increase in disposable income and the rural to urban migration drive demand in real estate. Hence, economic conditions trigger changes in FMV of the property.
The FMV is an important estimate that one must do before putting their property on sale. Therefore, always analyse your property’s worth basis the factors mentioned above, or hire professional real estate evaluators to make the job easy.