Fair Market Value

Fair market value is the price property would change hands for between a willing buyer and willing seller, neither under pressure and both reasonably informed. It is the standard used for tax, estate and legal valuations. For income property, it is usually built on a normalized NOI.

Fair market value and market value mean nearly the same thing in practice. The fair version shows up in tax assessments, estate filings, partnership buyouts and divorce settlements, where a court or agency needs a defensible number.

Appraisers working to this standard adjust the NOI before capitalizing it. They use market rent rather than a below-market lease, add a management fee even if the owner self-manages and remove one-time income. On the default house, that normalized NOI of $28,892 at a 6.5% cap rate points to about $444,500.