"Fair Market Value"

[Paul Ness MAI]

I hear you. At least you could give him back to his parents! I'm glad we're out of that stage of parenting, but we're heading into teen years with our daughter. One person in the house with PMS is enough!

 

[Fred]

From Greg:

An "unfair" market value would be when a person is under duress of some sort or where there are influences other than normal marketing factors

Same thing for "unjust" compensation?

 

[Restrain]

I have done manufacturing plants and had to deal with "fair market value" for the buildings and land, "value in use", "liquidation value" and "value as is", which is different from all of the above. It all comes down to the definition of value as requested by the client. In most real estate transactions, you are doing what has been normally called "fair market value" but was changed to "market value" when the USPAP form replaced the old 1004 form.

 

[Fred]

Just a thought -
When you folks do appraisals where the intended use involves federal income taxes, like a probate or gift tax assignment, do you
a. use the IRS standard "Fair Market Value,"
b. use the FRT standard "Market Value,"
ic. nclude the FRT definition because that is what is in the boilerplate already and explain that the difference in definition wording has no effect on value,
d. use the FRT definition with no explanation because you were unaware that the IRS has its own value standard,
e. other?

 

[Steve Owen]

I recently completed an appraisal that was going to IRS. It contained the following language:

The purpose of these appraisals is to estimate market value of the Fee Simple interest in the subject real estate as two separate properties; it should be emphasized that the market value of each of the two properties separately is not necessarily the same as the value of the two properties would be if appraised as a single unit. It is therefore, not economically valid to simply add the two separate values in order to determine the value of the whole.

Market Value will be as defined in the minimum appraisal standards set forth by Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and known as FIRREA, a definition that meets and exceeds the Internal Revenue Service (IRS) definition of Fair Market Value, which was provided to the appraiser as:

“the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”

The Internal Revenue Service of “fair market value” does not include the following economically necessary components:

A reasonable time allowed for exposure; payment in cash in United States dollars or in terms of financial arrangements comparable thereto; and price unaffected by special or creative financing or sales concessions.

It is the appraiser’s opinion that these additional components (particularly exposure time) must be included for any definition to be considered to be market value of any kind. Without these additional components, any given definition would necessarily be a value that could be influenced by financing considerations, by quick sale or extended exposure time considerations, or by trade or non-cash considerations.

Because the client’s attorneys requested it, the IRS fair market value language is included herein, the FIRREA definition of market value meets the IRS fair market value definition by including all of its components, but exceeds that definition by including the above named other economically necessary components, without which it would not be a market value definition of any variety. Therefore, within the body of this report, anyplace where the language “market value” is used should be considered to meet and exceed the IRS definition of “fair market value.” For the purposes of this report, the terms should be considered to be interchangeable and anyplace the language “fair market value” is used should be considered to be market value, as spelled out in the report section Market Value Defined, beginning on report page 10.

We can't blame the IRS or others for being outdated - some government agencies are going to require use of their terms. However, it is incumbent upon us that we properly appraise. I had informed the attorney involved, prior to the insertion of that language that the alternative was to appraise the property for "quick sale" since the IRS fair market value definition did not include a provision for exposure time. He agreed that that was probably not the intent of their requirement for the use of their term.

P.S. I was paid for the appraisal and did not receive any negative feedback.

 

[Austin]

Steven: Your post further complicates the problem. Should you make an adjustment for ‘definition of market value?’ The vast majority of transactions are based on the standard definition so logically a different definition would result in a different price. By dictating the definition of market value you can essentially come up with any price estimate you desire. My favorite example is the question axed in the standard definition of market value “most probable price.” When you use three comps and have the freedom to decide which one of the three most reflects the price of the subject, by cherry picking comps you can make any deal work. When appraisers do this, and I have never met one that didn’t, they are changing the definition of market value from “most probable price” to “highest price.”
Other examples are the proposed changes discussed in a thread last week about HUD’s new rules. More loans for people with poor credit, and no cash down payment, etc. This essentially changes the definition of the market and by inflating demand inflates prices for houses in this category. Change the definition of the market and you change the definition of market value. For example, about 25 years ago I was axed by the Farmers Home Administration to do their appraisal work. They told me up front that lots were worth $5,000 and houses costs $25 per square foot. All of the houses to be appraised were new construction. All they wanted me to do was tell them that a 1,000 sq ft house was worth $30,000. To be eligible for one of these loans you had to be ineligible for any type of conventional financing. They even paid part of the house payment. Is this a market? Apparently the definition of market value they used was: “(GLA x $25) +$5,000= market value.
This question of playing games with the definition of market value is what is driving the appraisal problem in my opinion. By creatively changing the definition they have corrupted the database to such an extent that they have thwarted the purpose of doing appraisals in the first place. Is there a place for appraisals in a People’s Socialist Republic? It is more fair and equal though, aye comrades.
Talk about tryanny; when the IRS can dictate the defintion of market value they can basically take anybody's property at will. I was in a court case once in which a commercial tract had a 1 foot strip down the middle of it. The lawyer instructed me to tell the court the value of that strip ignoring the adjoining property and plottage. Using that definition they stole the man's property.

 

[Jo Ann Meyer Stratton]

I had one client that asked for a market value (per the definition on the 1004B) of their REO properties and also a fair market value, which required my typing in their definition of fair market value into the report above my opinion of fair market value. So their reports had "as is" market value, "as repaired" market value, "as is" fair market value for a total of three opinions of value. Almost glad I haven't heard from them in over a year! Especially since their original loans were based on BPO's which is illegal in Arizona. So not only are the original loan amounts not even reflective of the market at the time of the original loan, it is being discovered that the properties were not even correctly identified. House across the street from the foreclosed property got re-keyed and emptied of all belongings by the realtor and had a pending contract (all based on the info from the original BPO based loan), until the realtor found out--it was the wrong improvement! No wonder they don't order appraisals from me---I confuse them with the facts on the right market and right property!!

 

[Fred]

Steve,
Nice job. You identified the key issue. The IRS definition does not mention reasonable marketing time. Nor does the Fair Market Value criteria in the Yellow Book (1992). I, too, include language in the report about how I deal with exposure time and reference other definitions.

On the same theme, how do feel about the check-box on the 1004-form that says 'over 6 months.' Is that a 'reasonable' time?

 

[Austin]

Steve Owen:
I just read your post at the end of page one and it is good but I think you left out one of the most essential elements of a good definition of market value, and that is how to deal with a range of value indications. For example, the present definition specifically says “most probable price.” When I first went into appraising it said: “Highest price in terms of money.” It could say; “Lowest price in terms of money.” In my view this language was put in the definition for the specific purpose of dealing with a value range. For example, if an appraiser used 30 comps instead of 3 and had a value range after adjustments of $90,000 to $110,000, how can the definition instruct the appraiser where to place the point estimate of price? That is why I contend that the term “most probable price” is used, because the only logical method of explaining a data range is using statistical methods and most probable price means the one with the highest probability or the one at the center of the bell curve assuming the curve it is not skewed. Again, by cherry picking comps to make the deal work, appraisers are changing the definition from "most probable" to "highest price."

 

[Red Blumenstock]

Hi Paul,

I was a member of the Appraisal Institute Appraisal Standards Board from 1991 to 2000 and we never used the term "Fair" market value. In fact there was a discussion early in that term that "Fair" market value was incorrect and the ASB added their comments in September, 1993 in AO-8.

I really agreee with you about the misunderstanding of the terms cap rate, equity yield rate, etc. I see this misused often in reports that I have reviewed.

Red