What does fair market value represent?

Fair market value represents the price a property would sell for in an open market under normal conditions. It is defined as the price agreed upon by a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell. This value is significant because it reflects the true market demand and supply dynamics rather than any subjective or artificial pricing based on other criteria.

In contrast, the other options do not accurately describe fair market value. The average value based on insurance company assessments may not account for the current market conditions or the actual selling price of similar properties. The value determined solely by the seller's cost might include incidentals that do not necessarily reflect the market's willingness to pay. Finally, replacement cost refers to how much it would cost to replace an asset with a new one, which again does not consider market dynamics in the same way that fair market value does.