Welcome to Wall Street Prep! Use code at checkout for 15% off.
Wharton & Wall Street Prep Certificates
Now Enrolling for September 2024 for September 2024
Private EquityReal Estate Investing
Hedge Fund InvestingFP&A
Wharton & Wall Street Prep Certificates:
Enrollment for September 2024 is Open
Wall Street Prep

Fair Market Value (FMV)

Step-by-Step Guide to Understanding Fair Market Value (FMV)

Last Updated February 20, 2024

Learn Online Now

Fair Market Value (FMV)

What is the Definition of Fair Market Value?

The fair market value (FMV) is the price set by the open market at which an asset could be sold (or purchased).

Since investors and buyers in the open markets are emotional decision-makers with cognitive biases, the fair value of assets fluctuates constantly.

The fair value of an asset is the price it’ll sell for in an open, competitive market whereby the seller and buyers all have adequate information with no external factors like time impacting their decision-making.

FMV Definition

Fair Market Value Definition (Source:

How to Calculate Fair Market Value (FMV)?

Two underlying assumptions for the fair value estimation are that the buyer and seller are both:

  • Assumption 1 → Willfully Entering the Transaction
  • Assumption 2 → Informed of Material Facts Regarding the Asset(s)

To provide specific examples, a seller in a distressed scenario divesting assets can often accept lower prices for the sake of convenience and time (i.e. a “fire sale”).

Despite the fact that the seller could likely receive a higher bid if given more time, quick sales of assets and receiving cash (i.e. urgent liquidity) could be prioritized above selling at the fair value of the asset.

For the second assumption, all material information of relevance should be shared on both sides. In other words, there should be no hidden information that could lead to a party underpaying or overpaying for the asset (e.g. defects).

On the date of transaction close, there should be a mutual agreement between the buyer and seller, who are both acting in their self-interests.


Real Estate Technical Interview Guide | File Download Form

By submitting this form, you consent to receive email from Wall Street Prep and agree to our terms of use and privacy policy.


Fair Market Value vs. Intrinsic Value: What is the Difference?

The concept of intrinsic value and fair market value (FMV) are similar, however, the fair value is determined by participants in the open markets, i.e. “supply and demand”.

  • Intrinsic Value → Unlike the intrinsic value of an asset, which is estimated after evaluating its fundamental profile (e.g. cash flow generation, profitability), the fair value is a readily available price set by the market.
  • Fair Market Value (FMV) → The benefit of the fair market value is the fact that a real buyer and seller were willing to exchange at the given price, which makes the valuation “fair” and market-based. At the end of the day, the market sets the price, regardless of the amount of diligence and fundamental research supporting a different valuation.

Fair Market Value Example: Real Estate Property Investment

As a simple example, if you’re selling a used car, the highest bid received from a buyer is the fair market value (FMV), as long as the two aforementioned criteria are sufficiently met.

Likewise, if you’re selling a real estate property, such as a commercial building, your objective is to find a buyer willing to meet (or exceed) the asking price.

If the asking price to sell the property is priced too high, it’ll sit on the market for a longer duration, but the probability of finding the highest-paying buyer increases (and vice versa).

Thus, estimating the fair market value of the property ahead of time can help in setting the pricing appropriately, so that the following two factors are balanced:

  1. Goal Purchase Offer Received
  2. Time Needed Until Closure

On a related note, the amount of real estate taxes owed post-sale is based on the fair value of the property.

The Wharton Online
and Wall Street Prep Real Estate Investing & Analysis Certificate Program

Level up your real estate investing career. Enrollment is open for the Sep. 9 - Nov. 10 Wharton Certificate Program cohort.

Enroll Today

What are Examples of Fair Market Value in Finance?

  • Stock Market (Share Prices) → Another example would be the share prices of publicly-traded companies, whereby the latest trading price (i.e. the most recent transaction) represents the fair value of the company’s stock. Since market pricing data is prone to containing anomalies (i.e. mistakes/errors, overbidding from irrational behavior), the average trading price for the day can be taken to arrive at a “normalized” share price.
  • Mergers and Acquisitions (M&A) → One of the more common use cases of the fair market value concept is in mergers and acquisitions (M&A), in which the purchased assets are often written up to their fair value as part of post-transaction purchase accounting. In effect, the value recorded on the books of the acquirer more accurately reflects the actual value of the asset, as opposed to the book value.
  • Insurance Sector (Claims) → Insurance companies frequently request the fair market value of the assets under coverage, as this impacts how much filed claims are worth. For the fair market value to be unbiased, an appraisal conducted by a third party is often done to value an asset without any conflict of interest.
Inline Feedbacks
View all comments

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.