What is the difference between fair market value and market value?

The history: Where the terms come from

To understand the difference between fair market value and market value , it's worth looking at history. The term "fair market value" is deeply rooted in German-speaking and especially Swiss law. It appears in laws that are decades old, for example, in expropriation law or cantonal tax laws. Traditionally, it referred to the value that a property would fetch in "normal business transactions."

"Market value," on the other hand, is the more modern, international term. It gained acceptance in Switzerland with the globalization of real estate markets and the introduction of international accounting standards. Today, when searching for the difference between fair market value and market value , one often finds a clash between tradition (fair market value) and modernity (market value).

Market value: The legal classic

Market value is often understood as the objective value. It is defined as the price that can be achieved in ordinary business transactions at the time of valuation, taking into account the legal circumstances and actual characteristics.

The key word here is "objective." Market value should be free from subjective preferences. If you've painted your walls purple because you love it, that might be valuable to you. Market value ignores these "affective values." Looking at the difference between market value and fair market value from a purely legal perspective, market value is often the figure cited in court or by the tax office (as a basis for imputed rental value or wealth tax). It suggests stability and legal certainty.

Market value: The economic pulse

Market value is defined more dynamically. According to modern standards (such as the Swiss Valuation Standards, SVS), it is the estimated amount for which an asset should be exchanged between a seller willing to sell and a buyer willing to buy on the valuation date.

Herein lies a subtle difference between fair market value and market value : Market value emphasizes the current willingness to transact (" willing"). buyer , willing seller ). It reflects the current sentiment in the real estate market. In an overheated market, market value can rise very quickly. A close analysis of the difference between fair market value and market value reveals that the fair market value often appears to be closer to the actual sales activity, while the fair market value is sometimes interpreted more conservatively.

Is there actually a difference?

Now we come to the heart of the matter. Is there a discrepancy between the figures? In modern Swiss valuation practice, the answer is usually: No, mathematically there should be no difference.

Both the Federal Court and the expert associations have clarified that the difference between fair market value and market value is primarily semantic today. In essence, both terms mean the same thing: the price that can be achieved under normal circumstances on the open market.

So why are we even talking about the difference between fair market value and market value ?

• Legal texts: Old contracts or laws still refer to market value.
• Insurance: Sometimes the market value is mistakenly confused with the current value (value of the building minus wear and tear, excluding land).
• Banks: Mortgage banks often use the term "fair market value" for their internal loan-to-value (LTV) limit. This can be set more conservatively (cautiously) than the aggressive price a buyer would pay. This creates a perceived difference between fair market value and market value , which is actually more of a "difference between the bank's appraisal and the selling price."

When the confusion of terms becomes dangerous

The difference between fair market value and market value becomes relevant when laypeople confuse the terms with other values.

A common misconception is confusing the assessed value with the tax value . In many cantons, the assessed value (cadastral value) is significantly lower than the market value. Anyone who believes their house is only worth what's stated on the tax bill is sorely mistaken.

Another minefield is the intrinsic value (real value). This calculates what a new building would cost, plus the land. For older houses, the intrinsic value might be high, but nobody wants to live there (bad location). Here, the difference between the market value and the fair market value (both of which would be low) and the intrinsic value (which is high) is significant.

So, if you ask about the difference between fair market value and market value , make sure your conversation partner isn't actually referring to real value or income value. Ideally, fair market value and market value should be identical.

The role of the assessment method

Whether the final figure on paper is "fair market value" or "market value" often depends on the method used.

• Hedonic method: Computer-aided comparisons. They provide a market value.
• Income approach: For investment properties. Also provides a market value.
• Mixed valuation method: Often used for owner-occupied residential property ( land value + current building value). The result becomes traditionally often considered Market value designated .

The difference between fair market value and market value lies primarily in the methodology. Modern real estate agents and banks almost exclusively rely on market values (hedonic valuation), while appraisers in inheritance disputes often still prepare traditional fair market value appraisals.

Conclusion

Don't let it drive you crazy. In summary, in current Swiss practice, there is hardly any relevant difference between fair market value and market value . Both terms describe the likely achievable selling price on the open market under normal conditions.

"Fair market value" is the term used by lawyers and reflects tradition. "Market value" is the term used by economists and reflects the future. What's important for you isn't the label, but the methodology behind it. Make sure the valuation uses current market data and isn't based on outdated asset valuations. If someone insists on a significant difference between fair market value and market value , critically examine their definition – often, a misunderstanding exists.

If you are looking for clarity about the actual value of your property without getting lost in the jungle of terms, Loft offers you simple and transparent ways to have it valued.

Glossary

• Market value: The traditional term, enshrined in Swiss law, for the objective market value of a property under normal business conditions.
• Market value: The internationally used term. It refers to the estimated amount at which a property would change hands between willing sellers on the valuation date.
• Intrinsic value (real value): The value that is composed of the costs for the new construction of the building (less depreciation due to age) plus the land value . It can from the Market value deviate .
• Affective value: The "collector's value". A subjective premium that a buyer pays for emotional reasons, but which is usually not included in the objective market value.
• Taxable value: The official value of the property, determined by the tax authorities. It is often significantly higher. under dem Market value .