Market value and actual cash value are different terms with different uses. Fair market value is the measure appraisers use to set a price on a piece of property. Actual cash value is an insurance standard that may determine how much the insurer pays you if your house or your car gets damaged.
Fair Market Value
The fair market value of a house, a business or anything else is the price to which a knowledgeable buyer and seller would both agree. What makes them knowledgeable is that they know prices in the market, and they know all the facts about the property. If the buyer doesn't know a house foundation is rotten, his offer is not based on the market value.
Both parties must want to close the deal, but neither one is desperate to do so, and neither one has an ulterior motive. A mother selling to her daughter, for example, might offer a price that is well below market value. And a bank that wants to close out a bad loan might accept a price that is below market value on a short sale or a foreclosure sale.
The Purpose of an Appraisal
Appraisers determine the fair market value of property – whether it's a rare stamp or a waterfront home – by comparing it to the sale prices of similar properties. A home appraiser first identifies important features of the property, such as the number of bathrooms, the square footage and the size of the lot. She then looks for homes with the same qualities that have sold in recent months and averages those sale prices. That average guides her in appraising the home she's currently evaluating.
Actual Cash Value
Actual cash value is a measure insurers use when deciding how much to pay for a damaged house or car. It's commonly defined as the cost of replacing the insured property, less depreciation for age. So if an insurance customer's $2,000 3-year-old television gets stolen, the insurer deducts three years of wear-and-tear from the $2,000 before writing the check. If that isn't enough to buy a comparable television, that's the customer's hard luck.
Calculating Cash Value
A minority of courts have defined actual cash value as equal to the fair market value, rather than the depreciated replacement value. Another approach is to set value by the broad evidence rule, which requires the insurer to consider added evidence such as the taxable value of the property. Whatever the method, you will be better protected with a replacement-value policy if you want to restore your property after a disaster strikes. Replacement value insurance covers the cost of replacing the property, even if it's more than the property's cash value.