Certified Valuation Analyst (CVA) Practice Exam

What does fair market value assume regarding the parties involved in a transaction?

1. It assumes a willing buyer and seller

2. It assumes a government regulator is involved

3. It assumes a forced sale scenario

4. It assumes a third-party appraiser is present

The correct answer is: It assumes a willing buyer and seller

Fair market value is defined as the price that a property would sell for on the open market, assuming both the buyer and seller are knowledgeable participants in the transaction. This concept is crucial as it emphasizes that both parties act within their own interests, without any undue pressure or compulsion. A willing buyer and seller are assumed to engage in a transaction under normal market conditions where both have reasonable knowledge of the relevant facts. This results in a price that reflects the true economic conditions of the market. The buyer is motivated to purchase, while the seller is motivated to sell, creating a balanced scenario that produces a fair valuation. The other concepts, such as the involvement of a government regulator, a forced sale scenario, or the necessity of a third-party appraiser, do not align with the basic premise of fair market value. These situations might alter the dynamics of supply and demand or the informational asymmetry typically present in transactions, which would not accurately reflect a genuine market valuation.