Bilateral Monopoly

[hastalavista]

From time to time a question is posted on the forum like this:

My subject is part of an existing parcel. It is being sold to the neighbor. It is surplus land "as is" and the neighbor (buyer) wants it because in order to do an addition, they need this area as a set-back. This land has no other use that I can see and does not border any other property other than the neighbor (buyer). They want to know the value- any suggestions?


The AI's 530 (Advanced Sales Comparison and Cost Approaches) course covered this and called it a bilateral monopoly (a term I was not familiar with! ). The course manual provides the following (which I am paraphrasing)-

Market value is based on conventional economic theory and predicts a unique market-driven price at the point where supply and demand are equal in a competitive market. This is true even in a monopoly, where there is only one seller, or monopsony (another term I wasn't familiar with!), where there is only one buyer, a unique price can be predicted. However, when the market consists of only one seller and one buyer (this is called a bilateral monopoly) there is no economic theory to predict a unique price. Bilateral monopoly theory can predict the minimum sale price and the maximum sale price only, but not a unique point value, and"suggests that any observed transaction price depends not on supply or demand but on the negotiating or bargaining skills of the buyer and the seller."​

The course suggested that the best way to treat the valuation problem in such a case is to provide three values:
A. The minimum market value of the area; perhaps its contributory value to its original lot.
B. The maximum market value; the value it would add to the neighbor's lot by allowing the neighbor to expand his improvement.
C. Something in between. However, the in between value calls for the appraiser to "estimate the negotiating skills of the two parties and employing the expected value technique."

Point C seems to call on quite a bit of forecasting skill by the appraiser that I personally may not feel that comfortable in attempting.
The course stated these two points:
1. It would probably be misleading to report only one of the two values (high or low) without prominently explaining the opposing point of view.
2. It would probably also be misleading to call the midpoint-price market value since it would "not be generated by market forces but only by the two individuals, and any other two individuals with different negotiation skills would generate another sale price."

I thought this was interesting and worth sharing.

I think if I were to be offered an assignment that had a bilateral monopoly condition of sale attached to it, I'd offer to provide the market value expressed as a range. That may be worthwhile for private parties. I'm not sure it helps if someone needs the appraisal for a mortgage loan?

 

[Stephen J. Vertin MAI]

Denis:

That is interesting. I have had similar situations in appraisal problem solving. Sounds like a good class.

 

[Farm Gal]

COOL BEANS! Thanks Dennis! That is a term I have struggled to define in less than a 1000 words (I usually use a picture ), nice to know it has a precise term which can be used.

I will probably never USE the term in my usual work, because I can assure you that the boss would :new_snipersmilie: me - he gets all fussy if I use fenestration or any fine, fun and functional words of more than 1-2 silla-babbles!

When you are attempting to value a landlocked tract, you really ARE dealign with that type of "C" situation.

Reality is land usually has some value... There is always some optimist with a helicopter... or who is convinced that s/he can talk a neighbor into ingress/egress rights (or at least USE).... but (Duh) the usual buyers are the ones with dirt next door!~

 

[Lawrence R.]

COOL BEANS! Thanks Dennis! That is a term I have struggled to define in less than a 1000 words (I usually use a picture ), nice to know it has a precise term which can be used.

I will probably never USE the term in my usual work, because I can assure you that the boss would :new_snipersmilie: me - he gets all fussy if I use fenestration or any fine, fun and functional words of more than 1-2 silla-babbles!

When you are attempting to value a landlocked tract, you really ARE dealign with that type of "C" situation.

Reality is land usually has some value... There is always some optimist with a helicopter... or who is convinced that s/he can talk a neighbor into ingress/egress rights (or at least USE).... but (Duh) the usual buyers are the ones with dirt next door!~

So THAT is where the black helicopters come from...landlocked property owners!!

 

[Marcia Langley]

Thanks, Denis!

That is very interesting and educational! You are going to be awsome the next time a poster raises this question.:icon_mrgreen:

 

[Fred]

Denis,
Never heard "bilateral monopoly." Probably wouldn't say that, sounds self contradictory. I think one buyer is called monopsony. Wouldn't say that either. Although, it is interesting that most people price property like this in the game Monopoly when you trade deeds.

The part is disagree with is where they say three values. They list four.

I agree that game theory (a term I would use) is how these problems often need to be solved, often dividing the cooperative surplus (a term I would use). Some appraisers make the mistake of treating these like ROW problems. PS, this was part of the field of study of that distraught mathmatician played by Russell Crowe in A Beautiful Mind.

 

[hastalavista]

I agree that game theory (a term I would use) is how these problems often need to be solved, often dividing the cooperative surplus (a term I would use). Some appraisers make the mistake of treating these like ROW problems. PS, this was part of the field of study of that distraught mathmatician played by Russell Crowe in A Beautiful Mind.

(my bold)

Steven-

I used a different example then the course did. In the course, the example was that a developer had assembled 5 of the six lots on a city block. City block lots sale for $X, but six lots (one block) would sell for a multiple of $X because it changed the HBU (larger commercial development). Solution "C" was to divide the cooperative surplus based on the negotiating abilities of the two parties.
So, would you simulate the Nash Bargaining Game to divvy up the surplus? :laugh:

 

[Fred]

So, would you simulate the Nash Bargaining Game to divvy up the surplus? :laugh:

I might, but that one souinds like a normal HBU question. We have some threads banging this around.http://appraisersforum.com/search.php?searchid=1080259

 

[Mike Boyd]

some[/I] value... There is always some optimist with a helicopter... or who is convinced that s/he can talk a neighbor into ingress/egress rights (or at least USE).... but (Duh) the usual buyers are the ones with dirt next door!~

Unless there is an active environmental group that, using PUBLIC FUNDS, (which often is unlimited) wants it kept in pristine, natural condition for breeding grounds for salamanders, spotted flys and mosquitos.

 

[c w d]

Very good post Denis. We need more like them. 2 weeks ago we had a guy that wanted us to do an appraisal like this on a small parcel of land owned by the city. We did some research, consulted with peers, talked to a few CG's and everyone said the same thing. There is no set way to do one of these appraisals. After some hard discussions and considerations we turned the assignment down because the city already said what they wanted for the property. The potential buyer didn't agree with it. But, when it came right down to it, there was no way we could lend credibility to the appraisal even if we were perfect in our methodology since we'd never done one of these and would have to state such a fact and everything course of action we took to try to become competent to do it. We did call around to several appraisers residential and commercial and none of them wanted the assignment. Even a imminent domain appraiser refused it.