Black’s Law Dictionary (Sixth Edition) defines “Fair Market Value” (in part) as:

The amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.

The challenge for a seller in pricing a property is to determine the highest plausible price a buyer would pay. Likewise, a buyer does not want to pay more than fair market value. Pricing a property too high in hopes that the “random nut” with more money than good sense may come along, is more likely to scare away legitimate buyers.

Most listing agents will prepare a free Comparative Market Analysis (CMA) for a seller, in the hope of listing the property and becoming the seller’s agent. Likewise, a buyer’s broker can help a buyer determine fair market value of property. A CMA is a report which compares the subject property with recently sold “comps,” or comparable properties. Of course, in Vermont, there are few “cookie-cutter” homes, so finding comps is almost like using the price of pears and apples to determine the price of oranges. This is done with “adjustments.” A similar house located up the road from the subject property recently sold for $150,000, but, unlike the subject property, it had no garage, and less acreage. Therefore we “adjust up” and the indicated value of the subject property is in the range of $170,000 – $180,000.

Real estate is driven by supply and demand. A beautiful Victorian which might be worth $600,000 in one place, but if it were in another town, it would sell for $200,000. In our current, competitive market, a serious buyer will want to be able to move decisively if the right house comes along; but s/he would not want be a fool and overpay. The best thing a buyer can do is to learn as much as possible, as quickly as possible, about local market conditions. What are the competing properties? What properties have sold in the past 6 months, and for how much?

The definition of fair market value precludes the “random nut” with more money than good sense, who will fall in love with the property, and pay too high a price. In order truly to be a fair market value, the price at which a buyer pays must be a price at which that buyer could also sell it for. As obvious as it may seem, there are enough unrealistic sellers and unrealistic buyers that it is necessary to state that fair market value has nothing to do with wishful thinking. Just because a seller “needs to get $275,000,” has not effect on the value of a home which will fetch no more than $240,000. Likewise, it is irrational for a buyer who says: “Why should I pay him double the amount he paid five years ago, that is too much profit!” Psychology does have an impact on fair market value, but only in so far as shared expectations about future value has an effect on market value today.

In reality, there is not a single price-point at which a property will sell in a free market situation; but rather there is a range within which the subject property would be likely to sell. A seller who needs to move because of a job relocation is more likely to end up selling towards the lower end of the range than one who is content to stay as long as it takes to get his or her price. In the real world, strange things happen: Sometimes a property which has been on the market for two years with little activity suddenly becomes “hot” and, suddenly, two or three buyers emerge with competing offers. The purpose of a CMA is to give a broker’s opinion of the likely price at which the subject property would sell, and to present the market data and the logical basis underlying this opinion.