In my profession as an equine appraiser, I am called upon for a variety of assignments to develop an opinion of value. I often see much confusion between Market Value and Fair Market Value.
What is Market Value vs. Fair Market Value? When a client asks what something “is worth”, the inquiry is typically for “market value”. Market value provides a base line for negotiations should the client decide to sell. For example, a client is interested in buying and importing a breeding stallion from Europe and needs assurance the price being asked is fair. Or a parent is interested in selling their daughters successful Equitation horse and wants to make sure their horse is being fairly priced. Fair Market value provides a hypothetical analysis of what a property is worth in the open market. For example, an individual has decided to donate their horse to a collegiate jumping team and needs an appraisal of value for tax purposes. Or, a successful show jumper died while in the care of stable and value needs to be determined for settlement or litigation.
MARKET VALUE provides a basis for the price the seller is ultimately willing to accept when selling. If the property is particularly rare, or in high demand, the client may choose to ask more than market value. If there is a need to sell quickly, or other factors mitigating a quick sell, the client may choose to offer less than market value to expedite a sale.
Market Value is an opinion of the most probable buy-sell price.
FAIR MARKET VALUE is a specific type of market value. It is defined by a legal or regulatory jurisdiction and varies with individual jurisdictions. It is often used for Federal use such as estate, gift tax, charitable contributions and litigation.
The following is a comparison between Market Value and Fair Market Value.
- A real buyer and seller exist
- A real transfer of title will take place
- Title to the property will transfer on a specific date
- Marketplace participants consider assignment conditions normal and typical (reasonable exposure time, normal marketing process, arms-length transactions, buyers and sellers are knowledgeable of relevant facts, parties acting in their own best interest, price in terms of cash and unaffected by creative financing, etc)
- Market Value reflects the Gross amount that would ne obtained. NOT the net amount (after expenses are deducted) that would be retained.
Market Value Definition – is the highest price that a willing buyer will pay for a good or service and the lowest price at which a willing seller will sell it if both the buyer and seller have all the relevant information concerning the purchase and the good or services has been exposed to the market for a reasonable time.
FAIR MARKET VALUE: (When using the IRS/Treasury Definition)
- There is no Actual buyer or seller. They are hypothetical parties.
- There is no transfer of title as the sale is “hypothetical”.
- There is no certain date of title transfer as the sale is “hypothetical”.
- There are certain “market perspective” assignment conditions (willing buyer and a willing seller, neither under any compulsion to buy or sell, both being aware of relevant facts).
- The use of the MOST COMMON market and reflects the price for which the subject property would sell at retail to the end user.
- Fair Market Value reflects the gross amount that would be obtained, including any buyer’s premium being added. (It does not include the Net amount, after expenses are deducted out, that are retained)
Fair Market Value Definition - The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value is NOT to be determined by a forced sale nor is the fair market value of an item to be determined by a sale within a marketplace other than that which the item would be most commonly sold to the public, taking into consideration the location of the item wherever appropriate.
It is imperative, and a USPAP (Uniform Standards of Professional Appraisal Practices) requirement, that during the first step in the appraisal process assignment that the appraiser and client have a clear understanding of the assignment by identifying the Value Type, Definition and Source.
- The type of value to be developed
- The definition of that value type
- A citation for the source of that value type definition.
Market Value appraisals typically have as their intended use the following:
- Client is looking for peace of mind. (Client can use as a benchmark in deciding on how much to pay for an item)
- Client is selling an item (Client can use as a benchmark to determine asking price)
Fair Market Value appraisals typically have as their intended use the following:
- Non-cash charitable contributions
- Estate settlements
- Gift taxes
Though both Market Value and Fair Market Value refer to the value of a horse, both definitions would be used in very different circumstances. It’s important when you are hiring an appraiser, that the appraiser understands the Scope of the Assignment, as the Appraiser will be the one to determine the Purpose of the Appraisal and whether to use Market Value or Fair Market Value.
Bridget Brandon, Principal at ValueMyHorse LLC, is a senior certified equine appraiser at the American Society of Equine Appraisers. Bridget has also successfully completed with the American Society of Appraisers her 15 hrs of USPAP (Uniform Standards of Professional Appraisal Practices) classwork and successfully completed the test in both Real Property and Personal Property Valuations. Bridget’s specialty is in appraising Sport, Performance and Trail horses and in breeding. She may be reached at firstname.lastname@example.org. www.valuemyhorse.com 2/13/2020