Fair Market Value vs. Market Value: What Is the Difference in Real Estate Appraisals?

One of the questions I am often asked is whether Fair Market Value and Market Value mean the same thing in a real estate appraisal.

At first glance, the two definitions appear very similar. Both generally assume a willing buyer and a willing seller, neither party being under pressure to act, and both having reasonable knowledge of the facts surrounding the property and transaction.

However, the distinction becomes important because the definition of value used in an appraisal depends on the intended use of the assignment. An appraisal prepared for mortgage lending may use a different reporting format and valuation framework than an appraisal prepared for estate, gifting, tax, litigation, or IRS-related purposes.

That is why understanding the difference between Fair Market Value and Market Value is important before ordering an appraisal. The issue is not always whether the appraiser can estimate a value. The issue is whether the appraisal is developed using the correct definition of value and reported in a manner appropriate for its intended use.

What Is Fair Market Value?

Fair Market Value is commonly used in IRS-related appraisal assignments, including estate tax matters, gifting, date-of-death valuations, inherited property valuations, and other tax-related purposes.

The IRS commonly describes Fair Market Value as the price at which property would change hands between a willing buyer and a willing seller, with neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

In practical terms, Fair Market Value is often the required definition of value when the appraisal is being prepared for:

• Estate tax reporting
• Date-of-death valuations
• Gifting purposes
• Trust administration
• Inherited property valuations
• Estate planning appraisals
• IRS-related appraisal assignments

For these assignments, the appraisal report often needs to provide more than a value conclusion. It needs to explain the reasoning, data, methodology, and support behind the value opinion.

What Is Market Value?

Market Value is commonly used in mortgage lending and financing-related appraisal assignments.

In lending assignments, the appraiser is typically preparing the report for a bank, lender, or financial institution. The appraisal is usually completed on a standardized form designed for mortgage underwriting purposes.

Market Value definitions used in lending also generally involve a willing buyer and seller, reasonable exposure to the market, informed parties, and a transaction unaffected by undue pressure. This is one reason the two definitions can sound very similar to property owners, attorneys, trustees, and estate representatives.

However, the intended use of the appraisal is different. A lending appraisal is usually prepared to help a lender evaluate collateral for a loan. An IRS-related appraisal is commonly prepared to support a tax, estate, gifting, retrospective valuation, or legal matter.

Why the Two Definitions Sound Similar

Many people assume Fair Market Value and Market Value are identical because both definitions include similar assumptions. Both generally involve:

• A willing buyer
• A willing seller
• Reasonable knowledge of relevant facts
• No undue pressure to buy or sell
• An open and competitive market

Because the language is similar, it is easy to assume that any appraisal using one definition can automatically be used for another purpose. That assumption can create problems.

The important question is not simply whether the definitions sound similar. The important question is whether the appraisal was prepared for the correct intended use, using the correct definition of value, in the correct report format.

David R. Collins, Certified General Appraiser:

“The definitions may appear similar, but the purpose of the appraisal matters. A bank appraisal is usually prepared for lending. An IRS-related appraisal is prepared for a different intended use, and that can affect the reporting format, level of support, and definition of value being applied.”

Why the Difference Matters in an Appraisal Assignment

The difference between Fair Market Value and Market Value matters because appraisals are not prepared in a vacuum. Every appraisal has an intended use and intended user.

For example, a lender may need an appraisal to determine whether a property provides sufficient collateral for a loan. In that case, the appraisal is commonly prepared for mortgage lending purposes using a lender-approved reporting format.

An estate representative, trustee, CPA, or attorney may need an appraisal to support a date-of-death valuation, estate tax filing, gifting decision, or IRS-related matter. In that case, the appraisal often needs to be prepared as a narrative report using Fair Market Value as the applicable definition of value.

These are not minor technical details. The intended use of the appraisal can influence:

• The definition of value
• The effective date of value
• The report format
• The level of analysis required
• The amount of explanation included in the report
• The type of supporting documentation needed
• The intended users who may rely on the appraisal

This is why a standard bank appraisal may not be appropriate for IRS, estate, gifting, litigation, or retrospective valuation purposes.

When Fair Market Value Is Commonly Used

Fair Market Value is commonly used when the appraisal assignment involves tax, estate, legal, or IRS-related matters.

Examples include:

• IRS Date of Death Appraisals
• IRS Estate Planning Appraisals
• IRS Estate & Gifting Appraisals
• Estate tax reporting
• Gift tax reporting
• Trust administration
• Inherited property valuation
• Retrospective valuation assignments
• Legal and litigation-related valuation matters

In these situations, the appraisal is often reviewed by attorneys, CPAs, trustees, estate representatives, government agencies, or the IRS. Because of that, the report usually needs to provide clear support for the value conclusion.

When Market Value Is Commonly Used

Market Value is commonly used in lending and financing-related appraisal assignments.

Examples include:

• Mortgage lending
• Refinance transactions
• Purchase financing
• Bank-required appraisals
• Residential lending appraisals
• Commercial financing assignments

These appraisal reports are often prepared on standardized forms because the intended user is usually a lender. The lender is primarily concerned with collateral risk, loan underwriting, and whether the property supports the financing decision.

That does not make a lending appraisal wrong. It simply means the appraisal was prepared for a different purpose.

Why a Bank Appraisal May Not Be Enough for IRS Purposes

A common mistake is assuming that an appraisal prepared for a bank can automatically be used for an IRS-related assignment.

In many cases, a bank appraisal was prepared for lending purposes only. It may not include the level of narrative explanation, supporting analysis, intended use language, or Fair Market Value definition needed for estate, gifting, or IRS-related work.

This is especially important for date-of-death valuations, where the appraisal may need to establish the Fair Market Value of a property as of a prior date. That retrospective value may be used for estate administration, tax reporting, step-up basis documentation, or related purposes.

For a deeper explanation of this issue, see Why a Standard Bank Appraisal May Not Meet IRS Requirements.

The Report Format Matters Too

The definition of value is only one part of the assignment. The report format is also important.

Many lending appraisals are completed on standardized forms designed for lenders. These reports may be appropriate for mortgage underwriting, but they are often not designed to provide the level of explanation needed for IRS, estate, gifting, litigation, or legal matters.

For many IRS-related assignments, a narrative appraisal report may be more appropriate. A narrative report allows the appraiser to explain the property, market conditions, comparable data, valuation methodology, and reasoning behind the value conclusion in greater detail.

This additional explanation can be important when the appraisal may be reviewed by an attorney, CPA, trustee, court, government agency, or the IRS.

Examples of Why the Intended Use Matters

The same property can be appraised for different reasons. Each assignment may require a different approach, effective date, report format, or definition of value.

For example:

• A homeowner refinancing a property may need a lending appraisal for a bank.
• An estate representative may need a date-of-death appraisal using Fair Market Value.
• A trustee may need an appraisal for trust administration.
• An attorney may need a supported valuation for litigation or settlement purposes.
• A CPA may need documentation for estate, gifting, or tax reporting.

In each example, the property may be the same, but the appraisal assignment is not the same. That is why the appraiser must understand the purpose of the assignment before determining the appropriate scope of work and reporting format.

Questions to Ask Before Ordering an Appraisal

Before ordering an appraisal, it is important to explain why the appraisal is needed. The appraiser should understand the intended use before determining the appropriate report type and definition of value.

Useful questions to ask include:

• Will this appraisal be used for lending, estate, IRS, gifting, or legal purposes?
• Should the appraisal be based on Fair Market Value or Market Value?
• Is a narrative appraisal report required?
• Is the valuation retrospective, such as a date-of-death appraisal?
• Will the report be reviewed by an attorney, CPA, trustee, court, or the IRS?
• Does the appraiser regularly handle this type of assignment?

These questions can help prevent the wrong type of report from being prepared for the assignment.

Related Real Estate Appraisal Resources

If you are researching appraisal requirements for estate, IRS, tax, or legal purposes, these related resources may also be helpful:

• Why a Standard Bank Appraisal May Not Meet IRS Requirements
• What Is a Date of Death Appraisal? Complete Guide
• Types of Real Estate Appraisals
• Estate Planning Tips
• Expert Witness Appraiser Guide

Work With an Appraiser Who Understands the Intended Use

At Collins & Associates, I personally complete appraisal assignments involving estate, IRS, gifting, litigation, tax, and complex valuation matters throughout Southern California.

My experience includes:

• Fair Market Value appraisals
• Date-of-death valuations
• Estate and trust appraisals
• IRS-related appraisal assignments
• Gifting appraisals
• Retrospective valuation assignments
• Real Estate Appraisal Reviews
• Expert Witness and Litigation Support

If you need an appraisal for estate, tax, gifting, IRS, or legal purposes, the definition of value and report format should be addressed before the assignment begins.

Request an Appraisal Consultation