Fair market value is the price at which a buyer and seller are willing to exchange a good.
If certain conditions are met, an item’s fair market value will represent an accurate valuation of the good being exchanged. Those conditions are:
Both parties know the relevant facts about the item
The trade serves the best interests of both parties
Both parties are free of any pressure to make the trade
The transaction is not so rushed that the buying party does not have time to make an informed decision
For example, a homeowner puts her house up for sale. She is asking for $300,000. A prospective buyer offers $270,000. The two negotiate, and finally agree on a price of $282,000. That’s the fair market value for the house. All conditions for the setting of a fair market value have been met, resulting in an accurate assessment of the property’s value.
Fair market values are widely used throughout business and commerce. They’re often used to assess taxes on property. A homeowner may own her home for many years, during which its value can change substantially. The home’s current fair market value will determine property taxes.
The insurance industry provides another example. After an automobile accident, the insurance company will use the car’s fair market value to determine what the claim is worth.

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