Certified Valuation Analyst (CVA) Practice Exam

What is the primary focus of fair market value?

1. Value in an open market with informed buyers and sellers

2. Selling price based on intrinsic value

3. Value based on liquidation scenarios

4. Valuations in controlled environments only

The correct answer is: Value in an open market with informed buyers and sellers

The primary focus of fair market value is the value in an open market with informed buyers and sellers. This concept emphasizes that fair market value is determined under conditions where both parties are knowledgeable about the market and the asset in question, without any undue pressure or coercion to buy or sell. It reflects the price at which a willing buyer and a willing seller would transact, assuming both have reasonable awareness of the asset and its characteristics. This definition is crucial because it establishes a baseline for valuing assets accurately, ensuring that the assessed value genuinely reflects the market’s conditions. It does not take into account liquidation scenarios, which involve forced sales at possibly depressed prices, and it is not limited to controlled environments where transactions may not reflect true market dynamics. The intrinsic value aspect also diverges from the fair market value definition, as the latter looks at open market transactions rather than subjective evaluations of worth. Overall, focusing on the interaction between informed buyers and sellers aligns with the principle of fair market value in valuation practice.