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What is Fair Market Price?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 November 2016
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    Conjecture Corporation
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The fair market price is the cost that a buyer is willing to pay for an asset, assuming that both the buyer and the seller are utilizing reasonable strategies to determine the market value of the asset. A price of this type is normally not developed on the spur of the moment, and must have some basis in fact. For this reason, arriving at a fair market price requires evaluating all relevant information regarding the asset, including determining the price range that buyers are likely to consider reasonable.

For sellers, identifying a fair market price often involves comparing the asset to what is known as like-kind property. In other words, the seller will look closely at the market prices associated with assets that are very much like the asset he or she wishes to sell. This method can often help define a general range for the fair market price that can narrowed down to an exact figure as other criteria are taken into consideration. Buyers will also perform comparisons to get an idea of what is a reasonable market price, and use that information to determine what they are willing to pay for the asset.

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The calculation of a fair market price is common when it comes to purchases such as used vehicles. In many parts of the world, a resource known as a blue book provides the basis for calculating that price. Essentially, the book takes into account the age of the vehicle and the rate of average wear and tear since the date that the make and model was released. Dealers will use blue book value as the starting place for setting the sale price, while also allowing for factors such as the replacement of worn parts or any extras that enhance the desirability of the vehicle. In some cases, dealers will use the fair market price found in the blue book as a sales promotion, by advertising certain vehicles as being priced below blue book value.

Municipalities also make use of the fair market price when it comes to calculating property taxes. In this setting, the municipality will consider such factors as the location of the property, the dimensions of the home and the size of the lot where the home is located to determine the market price. This figure is then used to assess the taxes, based on the percentages specified in the laws and regulations that apply in that jurisdiction. Depending on shifts in the fair market price, those annual property taxes may increase or decrease over the years.

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