The Difference between Fair Market Value and Current Indebtedness

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The difference between fair market value and current indebtedness is called equity. Equity refers to the portion of an asset's value that is not subject to any debt or other liabilities. In the context of a real estate transaction, fair market value represents the price that a property would likely fetch if it were sold in an open and competitive market. Current indebtedness, on the other hand, refers to any outstanding debts or loans secured against the property.

Equity can be calculated by subtracting the amount of current indebtedness from the fair market value of the property. For example, if a property has a fair market value of $500,000 and is subject to a mortgage with a current balance of $300,000, the equity in the property would be $200,000 ($500,000 - $300,000).

Equity is an important concept in real estate because it represents the value of the property that the owner actually owns outright. Equity can be used as collateral to secure loans, or it can be accessed through a cash-out refinance or home equity loan. Additionally, as the property increases in value over time and the amount of outstanding debt is reduced, the owner's equity in the property will increase.