Fair Market Value
The price a property would sell for on the open market between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts.
Fair market value (FMV) is the estimated price at which a property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. FMV is a crucial concept in tax lien and tax deed investing because it helps investors determine the true worth of a property relative to their potential investment.
Determining fair market value involves analyzing several factors: recent sales of comparable properties (known as "comps"), the property's location, condition, size, and features, current market conditions, and any unique characteristics that might add or subtract value. Online tools and county records can provide useful starting points, but experienced investors often combine multiple data sources for a more accurate estimate.
For tax lien investors, understanding FMV helps assess the security of their investment. A tax lien on a property worth $200,000 is far more secure than a lien on a property worth $5,000, even if both liens are for the same amount. Properties with higher FMV relative to the lien amount have more equity protecting the investor's position, and owners are more motivated to redeem.
Tax deed investors use FMV to calculate potential profit margins. If a property's fair market value is $150,000 and the minimum bid at auction is $10,000, there's significant room for profit — even after accounting for repair costs, quiet title expenses, and holding costs. However, FMV estimates should be conservative, especially for properties that cannot be physically inspected before the sale.