Question 1

How is fair market value determined?

Accepted Answer

Three common methods: comparable sales (what similar items sold for recently), income approach (what future cash flows the asset will generate), and cost approach (what it would cost to replace). Real estate typically uses comparable sales. Businesses often use a combination of income and market approaches.

Question 2

Who decides fair market value in a contract dispute?

Accepted Answer

Usually an independent appraiser or valuation expert. Well-drafted contracts specify the valuation method and who pays for the appraisal. If the contract is silent, a court may appoint an expert or use its own judgment.

Question 3

Is fair market value the same as appraised value?

Accepted Answer

Not always. An appraisal estimates fair market value, but appraisals can vary depending on the method used and the appraiser's judgment. Two appraisers can look at the same property and come up with different numbers. Fair market value is the concept; appraised value is one attempt to measure it.

Question 4

What happens if we can't agree on fair market value?

Accepted Answer

Most well-drafted contracts have a dispute mechanism — like each side hiring an appraiser and averaging the two, or using a third appraiser as tiebreaker. Without a mechanism in the contract, you're looking at mediation, arbitration, or litigation to settle the number.

Question 5

Can a contract set a price different from fair market value?

Accepted Answer

Absolutely. Parties can agree to any price they want. But if the price is drastically below fair market value, it might raise issues in certain contexts — like tax authorities questioning a sale to a related party, or courts examining whether adequate consideration existed.

Fair Market Value

Definition

In Practice

Common in these contract types

Related terms

Frequently asked questions about fair market value

Create a contract with proper fair market value clauses