Is an Appraisal Fair Market Value?

by Karen Briscoe
July 31, 2014

The technical answer is an appraisal is not fair market value.  Differentiating the terms by consulting resources is a good place to start.

According to Dictionary.com, the definition of appraisal is:  “A valuation of property (e.g. real estate, a business, an antique) by the estimate of an authorized person.”

There are three means appraisers typically utilize to arrive at value:  the sales comparison approach, the cost approach and the income capitalization approach.

The most common approach for an appraisal in the purchase of real estate with a mortgage or with cash is the sales comparison method.  It is based on the principle of substitution.  That is, an intelligent purchaser will pay no more for a property than it would cost to purchase a comparable substitute property.  The more homogeneous a property is and the more stable the market conditions, the easier it is to obtain comparables and thus the closer the appraisal will be to fair market value.

There is a delayed reaction that occurs with this approach as it requires the appraiser to look in the past at settled transactions and those that are already under contract.  Fair market value occurs in the present, in real time.  Substitution relies on the assumption that if a buyer could purchase another similar property they would and that is the best indicator of what a buyer would pay for the subject property.  Since the most unique factor of real estate is its location, which fundamentally cannot be changed, true substitution can never really occur.  What occurs is an estimation of value based on many factors put into a formula and that is not the same as fair market value.

Wikipedia states that Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market.

True fair market value of any commodity is thus arrived at when a buyer and seller agree to a price with specific terms and consummate the transaction.  Additionally, neither party is under duress, the parties are unrelated and thus at an “arms length”.  The commodity has had adequate exposure to the open market and financing terms are typical.

The only real way to “test” whether an appraised value of a property is fair market value is to expose it to the market.  If a ready willing and able buyer purchases it for that amount, then it has met the ultimate criteria.

The Huckaby Briscoe Conroy Realty Group is intimately familiar with the Northern Virginia, Washington DC and metro Maryland real estate market.  Whether looking to buy or sell in the area, Karen Briscoe and Lizzy Conroy would be delighted to be of assistance.  Please contact via the means most convenient for you:  www.HBCRealtyGroup.com, 703-734-0192, Homes@HBCRealtyGroup.com.

Karen Briscoe is Principal of the Huckaby Briscoe Conroy Group (HBC) and author of "Real Estate Success in 5 Minutes a Day". She is an Associate Broker in Virginia, a Certified Luxury Home Market Specialist, and a member of the Women’s Council of Realtors. Karen began her real estate career developing residential lots with the Trammel Crow Company in Dallas, and in commercial real estate with The Staubach Company in the Washington, DC Metro area. Karen has a Masters Degree from Southern Methodist University and her BA from Stephens College in Columbia, Missouri – her hometown.
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