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XI, 205: Definition of Market Value (11/01/05)
Our definition of market value is intended to ensure that appraisals reflect an opinion of market value after adjustments for any special or creative financing or sales concessions—such as seller contributions, interest rate buydowns, etc.—have been made. The appraiser must certify that he or she used the following definition of market value:
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs that are normally paid by sellers as a result of tradition or law in a market area;
these costs are readily identifiable since the seller pays these costs in virtually all sales transactions.
Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third-party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market’s reaction to the financing or concessions based on the appraiser’s judgment.
The asterisked section of the definition provides consistent interpretation for the appraiser. Specifically, we want to emphasize that the phrases “...those costs that are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions...” refer to all of the sellers in a specific market area.
No distinction is made between a specific group of sellers, builders, developers, or individuals in the resale market—they all are considered to be individual sellers in the market.
To illustrate: When a property seller is paying part of the purchaser’s settlement or closing costs—or is paying for an interest-rate buydown or other below-market financing—but virtually all of the other sellers in the market are not doing the same as a result of law or tradition, the appraiser would need to make an adjustment even if there are other groups of sellers—such as builders—who also are offering concessionary financing.
The appraiser can adjust a comparable property that has special or creative financing or sales concessions by comparing it to other properties that had financing terms offered by a third-party institutional lender—as long as that lender is not already involved in the subject property or transaction.
The appraiser should use his or her judgment in establishing the dollar amount for any adjustment to ensure that it approximates the market’s reaction to the financing or concession at the time of the sale.
