What is the fair market value?

Fair market value is defined as the estimated price that reflects the true worth of an asset in a competitive market, where both the buyer and seller are willing participants without any undue pressure or coercion. This concept assumes that both parties are knowledgeable about the relevant facts and are acting in their own self-interest, leading to a price that is truly reflective of the asset's market value.

Understanding fair market value helps in various situations, including real estate transactions, taxation, and auctions, as it provides a standard for what should be expected in terms of pricing. The idea is rooted in the principle that fairness entails the concept of voluntary exchange, where neither party is forced to proceed at a price that doesn't reflect their assessment of value.

Other definitions, such as the maximum price a buyer is willing to pay or the amount a seller demands, may reflect subjective elements or negotiation tactics rather than the objective measure of an asset's market worth. The agreement between buyer and seller can change under different circumstances, but the fair market value strives to capture an unbiased estimate based on current market conditions.