Key Takeaways
- There is no precise formula to find a fair market value. However, there are a variety of factors that may inform the value of the asset.
- Fair market value is widely used in art, real estate, car appraisal, stocks and bonds, tax settings, and insurance companies in determining some claim payouts.
- There are three types of art valuation, including auction value, insurance value, and fair market value, also known as retail value.
Whether for art evaluation, real estate, car appraisals, taxes, or something else, fair market value (FMV) plays a fundamental role in the investment space. For that matter, the FMV of assets is vital information to know before investing. But how does one calculate fair market value, and what does it ultimately mean for investment portfolios?
What is Fair Market Value?
Essentially, fair Market Value (FMV) is the amount a business, product or asset would bring on the open market, assuming the buyer and seller are each adequately knowledgeable about what is for sale. FMV also assumes the parties are acting on their own accord, are under no compulsion, and are allowed a reasonable time period for transaction completion. If such conditions are met, an asset’s FMV can serve as a valuation or assessment of an asset’s worth.
The are basically four ways to determine FMV:
- Selling price or cost. The price at which an asset that has recently been bought or sold can be a solid indicator of the asset’s FMV.
- Sales of comparable assets. When a real estate agent gives a potential home seller a roster of recent home sale prices for similar area homes, it is a way in which fair market value is determined.
- Price of replacement. This refers to the amount one must pay to construct or buy a similar asset or property.
- Expert opinion. When one hires a professional appraiser for a valuation, the amount they arrive at will be the FMV.
What is Fair Market Value Used For?
Fair market value is widely used in art, real estate, car appraisal, stocks and bonds, tax settings, and insurance companies. Fair market value is also sometimes used in business sales, salary negotiations, and more. The key is arriving at a price deemed reasonable by both parties.
What is Fair Market Value in Art?
In art, a question FMV poses is, what is the amount a willing buyer would pay a willing seller for an artwork, if each party possesses relevant facts? Fair market value also asks, what is a reasonable amount to seek for the artwork if one were to resell it in the current open market?
How is Fair Market Value Assessed in Art?
Placing a value on art calls for more than a simple appraisal. There are three types of art valuation, including auction value, insurance value (the amount needed to replace an item), and fair market value, also known as retail value.
How Do You Calculate Fair Market Value for Art?
There is no precise formula for arriving at an FMV. However, there are a variety of factors that may inform the value of art or other assets. The chief approaches to valuation include:
- Income. This approach is used to assign a value to an artwork that may be used during ownership to generate income. Organizations commonly use this when renting art to exhibit.
- Comparative market data. Commonly used with private collections, this approach seeks to establish the cost incurred when buying a work by the same artist, or one of comparable quality. It also seeks to compare that cost with works of the same genre, material, and content.
- Cost. With this approach, which is more commonly used for works by artists whose works have never sold, value is determined based on the elements comprising the artwork.
What is Fair Market Value in Real Estate?
In real estate, fair market value is basically the price a willing buyer would pay a willing seller for a property in the open market, sans the presence of existing supply and demand conditions. In other words, outside factors would have no bearing on negotiated price and terms.
The FMV, which is determined during home-buying when financing is part of the process, is also considered by appraisers in their appraisal report. Note that an appraisal is not always the same as fair market value.
How is Fair Market Value Assessed in Real Estate?
Typically, real estate agents use FMV when working with a buyer or seller to craft an offer or listing strategy. Fair market value is specifically used in this context to establish a price or price point at which a property will sell.
How is Fair Market Value Calculated in Real Estate?
In real estate, taking the value of at least three comparable properties that were recently sold, then figuring an average is how you calculate FMV.
How to Purchase Art and Real Estate
Three of the primary ways to buy art and real estate include:
- Auctions. In art as well as real estate, auctions can offer a level playing field for investors.
- Crowdfunding. An issue here is that crowdfunding rivals can use miscellaneous fees to undercut investors’ internal rate of return.
- Private market investing. There are ways to invest in art and real estate in the private market.
How to Invest in Real Estate and Art Through Yieldstreet
Facing stubborn inflationary levels and intrinsically volatile public markets, many investors are turning to alternative assets such as real estate and art. With low correlations to the stock market, such alternatives can diversify one’s portfolio and provide stable secondary income.
While all investments carry some degree of risk, the fact is that in the last 23 years, art has outperformed the S&P 500. And during the same period, on an absolute and risk-adjusted basis, private real estate has performed better than U.S. equities and fixed income. And because income and property prices in the U.S. have historically outpaced inflation, real estate can generally be a sound investment.
The alternative investment platform Yieldstreet, about which you will learn more later, offers curated and vetted opportunities in art and well as real estate. To date, more than $3 billion has been invested with Yieldstreet, with returns north of $1.8 billion.
In art, Yieldstreet has a fractional ownership program comprising a varied collection of artworks by blue-chip and mid-career artists, with a $10,000 minimum buy-in. The platform also offers art funds – privately held investment funds that buy, manage, and sell art pieces to generate returns. Yieldstreet’s art equity funds have various terms available.
In real estate, Yieldstreet offers private and commercial opportunities with investment minimums as low as $5,000. Offerings include multi-family properties – both existing and under construction — and dedicated rental communities. The platform also offers a growth and income real estate investment trust (REIT), in which investors can gain exposure to more than one commercial real estate properties in a single investment.
Overarchingly, Yieldstreet’s offerings are opportunities to diversify portfolios, which is a key to successful investing.
Alternative Investments and Portfolio Diversification
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.
To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
Learn more about the ways Yieldstreet can help diversify and grow portfolios.
Summary
It is important for investors to understand what fair market value is and how it works, particularly in art and real estate. Such alternative assets are increasingly popular as ways to reap steady returns while protecting against inflation, and diversifying investment holdings.
All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]