market value
The major focus of most real property appraisal assignments. Both economic and legal definitions of market value have been developed and refined. Continual refinement is essential to the growth of the appraisal profession.
1. The most widely accepted components of market value are incorporated in the following definition:
The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.
2. Market value is defined in the Uniform Standards of Professional Appraisal Practice (USPAP) as follows:
A type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal. (USPAP, 2002 ed.)
USPAP also requires that certain items be included in every appraisal report. Among these items, the following are directly related to the definition of market value:
o Identification of the specific property rights to be appraised.
o Statement of the effective date of the value opinion.
o Specification as to whether cash, terms equivalent to cash, or other precisely described financing terms are assumed as the basis of the appraisal.
o If the appraisal is conditioned upon financing or other terms, specification as to whether the financing or terms are at, below or above market interest rates and/or contain unusual conditions or incentives. The terms of above- or below-market interest rates and/or other special incentives must be clearly set forth; their contribution to, or negative influence on, value must be described and estimated; and the market data supporting the opinion of value must be described and explained.
3. The following definition of market value is used by agencies that regulate federally insured financial institutions in the United States:
The most probable price which 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 and 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in what they consider their best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
o 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.
(12 C.F.R. Part 34.42(g); 55 Federal Register 34696, August 24, 1990, as amended at 57 Federal Register 12202, April 9, 1992; 59 Federal Register 29499, June 7, 1994)
4. In 1993, the Appraisal Institute Special Task Force on Value Definitions put forward the following definition of market value:
The most probable price which a specified interest in real property is likely to bring under all of the following conditions:
o Consummation of a sale occurs as of a specified date.
o An open and competitive market exists for the property interest appraised.
o The buyer and seller are each acting prudently and knowledgeably.
o The price is not affected by undue stimulus.
o The buyer and seller are typically motivated.
o Both parties are acting in what they consider their best interest.
o Marketing efforts were adequate and a reasonable time was allowed for exposure in the open market.
o Payment was made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.
o 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.
This definition can also be modified to provide for valuation with specified financing terms.
5. The International Valuation Standards Committee defines market value for the purpose of international standards as follows:
Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
(International Valuation Standards 2001. London: International Valuation Standards Committee, 2001, 92.)
Persons performing appraisal services that may be subject to litigation are cautioned to seek the exact definition of market value applicable to the jurisdiction where the services are being performed. For further discussion of this important term, see The Appraisal of Real Estate, 12th ed.
(Chicago: Appraisal Institute, 2001), 21-24
