What does "fair market value" indicate in property valuation?

"Fair market value" refers to the price that a property would likely sell for in an open market under normal conditions, where both the buyer and the seller are acting prudently and without duress. It reflects a true market consensus based on numerous factors including recent sales of similar properties, the condition of the property, and current market trends.

Unlike book value, which is based on the accounting value of an asset and may not reflect actual market conditions, fair market value provides a clear picture of what a property is worth in the eyes of potential buyers and sellers. It also differs from the amount spent on renovations, which does not necessarily correlate with market value—spending a large sum on improvements does not always translate to an equivalent increase in property value. Lastly, while an appraised value provided by a lender may serve as a useful benchmark, it is not necessarily the same as fair market value, as appraisals can vary greatly based on the appraiser's methodology and the overall market conditions at the time of appraisal.

Thus, by understanding that fair market value is essentially the price at which the property would sell in an open market, one gains a comprehensive view of property valuation that is reflective of real-world conditions.