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

Definitions and their pitfalls

What is the market value?

Put simply, market value is the "objective" value of a property. In Switzerland, appraisers and banks use definitions stating that market value is the price that could reasonably be expected to be achieved in ordinary business transactions, taking into account the property's characteristics.

Sounds like market value? Theoretically, yes. But: Market value is calculated . It's based on models (like hedonic valuation) that analyze comparable property transfers , the building's condition, and its location. It attempts to eliminate emotions. When banks grant mortgages, they rely on this value. It's conservative. The difference between market value and fair market value often lies in the cautiousness of the valuation.

What is the market value (or purchase price)?

The market value (often equated with the effective purchase price) is what the final invoice shows. It is the result of supply and demand in the here and now.

When three parties are in dispute over a house, its market value rises, even though the building's structure (and thus its theoretical market value) hasn't changed. Market value often includes so-called "sentimental value" (affective value). Someone falls in love with the rose garden and pays 100,000 francs more. This is precisely where the difference between market value and assessed value arises .

The difference between fair market value and market value in practice

The financing trap

Why is the difference between assessed value and market value so critical for you? Let's imagine you want to buy a house.

• The seller: Wants 1.2 million Swiss francs (market value/asking price).
• The bank: Calculates the value at 1.0 million Swiss francs (market value).

Here, the difference between fair market value and market value becomes an obstacle. The bank typically lends a maximum of 80% of the lower value (lower of cost or market principle).

• 80% of 1.0 million (market value) = 800,000 Swiss francs mortgage.
• So you not only have to bring the usual 200,000 francs (20% of 1.0 million) in equity, but also the difference of 200,000 francs that the difference between fair market value and market value represents.

Your equity requirement suddenly doubles to 400,000 Swiss francs. Anyone who doesn't factor in the difference between the assessed value and the market value will have their financing fall through.

Legal aspects and taxes

The difference between fair market value and market value is also relevant for tax purposes.

• Wealth tax: This is often based on the official value, which in turn is derived from the market value, not the current hype price.
• Inheritances: When a house is passed down within a family, the fair market value is often used to ensure fairness. If the speculative market value were applied, heirs would often have to sell to pay out their co-heirs. In these cases, the difference between fair market value and market value often protects against unfair payouts.

An example to illustrate this.

Let's take an old farmhouse in the canton of Bern.

The building is old, the heating system needs to be replaced.

• Market value: An appraiser soberly assesses the location and condition at 800,000 Swiss francs.
• Market value: A Zurich couple is looking for "peace and romance" and sees the potential. They are offering 1.1 million Swiss francs.

The difference between the assessed value and the market value here is 300,000 Swiss francs. This amount is purely emotional or speculative. For the couple, the house is worth this price (subjective market value), while for the bank it remains a risk (objective assessed value). The difference between assessed value and market value represents the risk the bank is unwilling to bear.

Who determines these values?

It's difficult for a layperson to distinguish between the assessed value and the market value of a specific property. Various professionals can help you with this.

1. Banks and online calculators

They typically use hedonic models. They compare your property to thousands of sold properties. The result is usually very close to the market value. They will show you where the difference between market value and fair market value becomes a risk.

2. Professional appraisers (SIV/SEV)

An architect or certified appraiser inspects the property. They will notice cracks in the masonry or a damp basement. Their appraisal is the most precise way to define the market value and to explain the difference between market value and fair market value .

3. Innovative support: heyloft.ch

In the digital world, there are new ways to analyze the difference between assessed value and market value . heyloft.ch goes a step further than traditional calculators in this regard.

The platform uses the digital assistant "Loft" .

Loft is more than a calculator. It helps you understand the difference between assessed value and market value by providing context.

• Is the high market value justified by the development of the district?
• What is the difference between the assessed value and the market value of similar properties in the area?

Loft acts as an independent entity. It has no interest in artificially inflating the price (like a real estate agent) or artificially minimizing it. It provides data. Anyone wanting to understand the difference between assessed value and market value will find in Loft a neutral partner who sheds light on the complexities of the numbers.

How to use the difference between fair market value and market value

As a seller, you can use the difference between fair market value and market value : Know the fair market value (your lower limit) and play on the emotions of buyers to maximize the market value.

As a buyer, the difference between the assessed value and the market value is a warning sign: If the gap is too large, you're paying a "collector's price." You might never see that money again if you try to resell it quickly.

Conclusion

In summary: Fair market value reflects rational considerations, while market value reflects the actual market situation. The difference between fair market value and market value lies in the scope for negotiation, but also in the range that determines your financing options. For the bank, security is paramount (fair market value), while for the seller, maximum profit is key (market value).

Anyone who naively enters a transaction and ignores the difference between assessed value and market value risks expensive refinancing. Therefore, use all available sources. Traditional appraisals provide security, but innovative tools like Loft from heyloft.ch offer you the necessary market transparency and speed to not only understand the difference between assessed value and market value , but also to use it strategically to your advantage.

Glossary

• Market value: The objectively determined value of a property that can be achieved under normal circumstances. It serves as the basis for banks to grant loans.
• Market value: The actual price achieved on the market, which may differ from the fair market value due to supply, demand and emotions (collector's value).
• Lower of cost or market principle: The principle of banks to choose the lower of the purchase price (market value) and the fair market value when granting mortgages.
• Hedonic valuation: A computer-aided comparative valuation method to determine market value based on historical transaction data.
• Difference between fair market value and market value: The difference between the calculated, objective value and the actual selling price, often caused by emotional premiums or market pressure.