MV opinion vs a price estimate

[jay trotta]

FWIW. Somewhere, years ago. I read something like: Only the courts and the parties in a transaction determine price. Appraisers provide a value. Or something like that.

Real estate 101 - a meeting of the minds

I see the purple chair spinng at the speed of light or beyond, it's a cliff hanger all the way to the end, if there is one...................

 

[J Grant]

Liquidation mostly. Marketable cash value for a divorce. One time I was asked to appraise a small piece of land being transferred between neighbors that had no independent legal use. I determined an equitable value. In all of those cases I determined a price............because value is a price, regardless of the specific value definition.

Liquidation value is still a form of market value. As is "marketable cash value " ( whatever that is ).

Look , I understand we end up at a price (usually ) in most assignments, and the price of course is very important, or even the reason people order an appraisal . However, we do not give an opinion of price ( unless we state that ) we give an opinion of market value ( as defined) , for the price ) Insurable value is not a transaction based but how often do we do that ? Most of us , never.

As you just noted, different types of market value produce different prices. Which is why we give a market value opinion ( as defined ) and the "as defined " sale conditions and terms in the market value definition used for the most probable price.

We are assigned to appraise a house at 32 Cherry Street on the same day , for two different appraisals - one appraisal purpose of an opinion of market value, the other appraisal purpose an opinion of liquidation value. The market value appraisal purpose produces a price of $300,000. the Liquidation value purpose appraisal produces a price of $250,000.

 

[J Grant]

Real estate 101 - a meeting of the minds

I see the purple chair spinng at the speed of light or beyond, it's a cliff hanger all the way to the end, if there is one...................

Correct, a meeting of the minds produces a price.
In the real market place, the meeting of the minds is between two actual people - Bob sells a house to Sally.
In an appraisal sales comparison approach, we create a presumed "sale" between a model buyer and seller who transact at the terms of the market value definition used

Some appraisers believe we are trying to predict an actual price a Bob and Sally will pay !!!! Which is why they have angst about all the other possible prices .. We have no control over what any actual Bob or Sally agree on in price, and thus no way to correctly predict an actual price. The only control we have is to develop our own appraisal, which derives a market value opinion, as defined, of the most probable price the appraisal model buyer and seller transact for.

 

[J Grant]

Market Value, Disposition Value or Liquidation Value Appraisal | Elliott & Company Appraisers

Market Value, Disposition Value or Liquidation Value Appraisals each offer different values per the amount of time required to move the asset.

elliottco.com

A good article !
These are different types of value, but the appraiser is still giving a value opinion in each ( not giving a price opinion ). Using a different definition of value though, will often yield a different most probable price for the value opinion.

 

[jay trotta]

Found this in a writing, don't remember who it was; hope this helps you both; good luck

Value vs. Cost vs. Price
It is important to understand the differences between the terms value, cost and price as they are associated with the appraisal process. Given the various ways the terms are used outside the field of appraising, often the distinction between them is lost, but the conceptual differences are profound and must be clearly understood by the appraiser.
In brief, value is a measure of worth based on the future benefits anticipated to accrue because of ownership of a property.
Price is the amount of money a seller is asking for a property.
Cost is the amount of money that the buyer actually paid or will have to pay for a property.
Value is a difficult term to define. It, like time and distance, is a general concept that is best understood if we consider ways in which it can be measured such as by relating value to the current asking prices for comparable properties, or to amounts that were actually paid for comparable properties which were sold in the past. As noted in the USPAP definition of the term, “value” is expressed as an opinion and not as fact.

 

[J Grant]

Found this in a writing, don't remember who it was; hope this helps you both; good luck

Value vs. Cost vs. Price
It is important to understand the differences between the terms value, cost and price as they are associated with the appraisal process. Given the various ways the terms are used outside the field of appraising, often the distinction between them is lost, but the conceptual differences are profound and must be clearly understood by the appraiser.
In brief, value is a measure of worth based on the future benefits anticipated to accrue because of ownership of a property.
Price is the amount of money a seller is asking for a property.
Cost is the amount of money that the buyer actually paid or will have to pay for a property.
Value is a difficult term to define. It, like time and distance, is a general concept that is best understood if we consider ways in which it can be measured such as by relating value to the current asking prices for comparable properties, or to amounts that were actually paid for comparable properties which were sold in the past. As noted in the USPAP definition of the term, “value” is expressed as an opinion and not as fact.

Explains the point I have been trying to make, appraisers per USPAP give value opinions, we don't give price opinions.

Maybe there is a way for an appraiser to give a price opinion and be USPAP compliant but I don't know what that is so might be a topic for a different thread.

Being that appraisers are supposed to understand the concepts not just in general terms but specifically how they are applied wrt USPPA, one woujld think they would understand a value opinion, or a market value opinion, is not a price opinion - so to see posts saying what difference does it make it is just semantics? It is not just semantics, one is USPAP complaint and fulfills the purpose stated of an appraisal, the other does not. They use the rationale that a market value Definition = a price ( at the definition terms ) to a market value is a price opinion and so on. opinion and so on.

I agree the fact that appraisals use terms that are also out in the public and that other RE professionals use is problematic. It makes the clients and public confused at what we mean, and seems to make some appraisers confused as well. I wish our profession had its own words for important concepts, the way the legal or medical /other professions do.

 

[RCA]

It's both in my reality. I've never seen a definition of value that didn't correlate to a price: most probable price, price with a constrained marketing time, etc.

An appraisal is an opinion of value. Value is a price. An appraisal is an opinion of price.

Yea sure, market value "correlates" to a price in an assumed hypothetical transaction.

Price is actually something that has transpired, involved an exchange of assets, where I believe we may assume that whatever assets are used gets translated into a monetary equivalent. So, if Mr X buys a house from Mr Y for 300 pigs, 4 horses and 30 young milk cows, that later could be called the price, but for financial purposes we would determine the market value of the animals in dollars, perhaps discounting for some issue or another such as sale fees; then we could use that market value for the market value of the transaction. Of course in each appraisal their is most likley error, or if you prefer, - the potential for error. So, in this case, we would be compounding any errors. So it might better if Mr X would sells his animals first and use that money for the house transaction. Except, of course, if maybe Mr. X thinks he has a chance of fooling Mr Y that the animals are worth significantly more that what they really are. But, then if Mr. Y buys into that, he cannot be considered knowledgeable, so the appraisal may turn out worse than expected because the appraiser may decide to punish Mr X for cheating and Mr. Y for being an idiot, which USPAP does not say much about in terms of exactly how an appraiser should handle such a situation, - and who is going to think the appraisers is up to no good anyway (he is not gaining anything financially)? Yep, it's a risk for Mr. X to not sell the animals, and a risk to sell them. We can talk about risks for Mr. Y, but I will leave that as exercise for the reader.


Market Value is the price in a hypothetical transaction defined by certain parameters and conditions..


Some definitions of Market Value say it is the most probable price. However, they fail to define "most probable price" correctly. The Dictionary of Real Estate Appraisal has

"most probable selling price: The price at which a property would most probably sell if exposed ..."

But that is completely circular. Now they still need to define "most probably."

Now Mr. Hillborn you are a mathematician, and you should be aware that "most probably" and "probably" can have various definitions. Now suppose I have a hypothetical event with 4 outcomes for the seller: A, B, C and D. A= not sell @ probability = 1%, B=sell for $100M @ probability=45%, C= get sued and lose $10M @probability = 4%, D= Sell for $50M profit probability @ 50%. What is the most probable value? Most mathematicians would say 0 x 0.01 + 100M x 0.45 + -10M x 0.04 + 50M x 0.50 = $69,600, using weighted average. But of course probability of actually getting $69,600 is 0. It will never happen by definition. The most probable outcome is actually D at 50%.

So, you might say the example is unrealistic in real estate. I would argue that it is not. We have many buyers who tend to fall into different preference and requirement categories. Some groups of buyers will pay much more for certain properties and some groups significantly less. If you want to predict the price a property would sell at at any particular time, as a sales broker, then you would first look very closeley at the market to see what kinds of buyers are present. Actually, one can argue this is something the appraisers should do as well - he should observe the market and uncover any important market conditions.

Thus, I would, anyone defining Market Value on the bases of "most probable" sale price, needs to define what they mean by "probable." and provide a protocol for determing whether a price is "most probable".

 

[JeffSH]

Yea sure, market value "correlates" to a price in an assumed hypothetical transaction.

Price is actually something that has transpired, involved an exchange of assets, where I believe we may assume that whatever assets are used gets translated into a monetary equivalent. So, if Mr X buys a house from Mr Y for 300 pigs, 4 horses and 30 young milk cows, that later could be called the price, but for financial purposes we would determine the market value of the animals in dollars, perhaps discounting for some issue or another such as sale fees; then we could use that market value for the market value of the transaction. Of course in each appraisal their is most likley error, or if you prefer, - the potential for error. So, in this case, we would be compounding any errors. So it might better if Mr X would sells his animals first and use that money for the house transaction. Except, of course, if maybe Mr. X thinks he has a chance of fooling Mr Y that the animals are worth significantly more that what they really are. But, then if Mr. Y buys into that, he cannot be considered knowledgeable, so the appraisal may turn out worse than expected because the appraiser may decide to punish Mr X for cheating and Mr. Y for being an idiot, which USPAP does not say much about in terms of exactly how an appraiser should handle such a situation, - and who is going to think the appraisers is up to no good anyway (he is not gaining anything financially)? Yep, it's a risk for Mr. X to not sell the animals, and a risk to sell them. We can talk about risks for Mr. Y, but I will leave that as exercise for the reader.


Market Value is the price in a hypothetical transaction defined by certain parameters and conditions..


Some definitions of Market Value say it is the most probable price. However, they fail to define "most probable price" correctly. The Dictionary of Real Estate Appraisal has

"most probable selling price: The price at which a property would most probably sell if exposed ..."

But that is completely circular. Now they still need to define "most probably."

Now Mr. Hillborn you are a mathematician, and you should be aware that "most probably" and "probably" can have various definitions. Now suppose I have a hypothetical event with 4 outcomes for the seller: A, B, C and D. A= not sell @ probability = 1%, B=sell for $100M @ probability=45%, C= get sued and lose $10M @probability = 4%, D= Sell for $50M profit probability @ 50%. What is the most probable value? Most mathematicians would say 0 x 0.01 + 100M x 0.45 + -10M x 0.04 + 50M x 0.50 = $69,600, using weighted average. But of course probability of actually getting $69,600 is 0. It will never happen by definition. The most probable outcome is actually D at 50%.

So, you might say the example is unrealistic in real estate. I would argue that it is not. We have many buyers who tend to fall into different preference and requirement categories. Some groups of buyers will pay much more for certain properties and some groups significantly less. If you want to predict the price a property would sell at at any particular time, as a sales broker, then you would first look very closeley at the market to see what kinds of buyers are present. Actually, one can argue this is something the appraisers should do as well - he should observe the market and uncover any important market conditions.

Thus, I would, anyone defining Market Value on the bases of "most probable" sale price, needs to define what they mean by "probable." and provide a protocol for determing whether a price is "most probable".

This is akin to saying, market value doesn't correlate to the real world because MV is based on a hypothetical transaction. If you want a value that's relevant to the realities of the actual market, then you should talk to a broker.

 

[JeffSH]

Look , I understand we end up at a price (usually ) in most assignments

No. This is an absolute. We deal with prices. That's our job. Even in an assignment where you are tasked to determine the reaction to a new pork processing plant on the surrounding real estate, you are determining the difference in price.

 

[RCA]

This is akin to saying, market value doesn't correlate to the real world because MV is based on a hypothetical transaction. If you want a value that's relevant to the realities of the actual market, then you should talk to a broker.

This is nonsense.

1. A hypothetical transaction is by definition not in the real world, but most likely does model a real world component.
2. For A to correlate to B, we mean to say A changes as B changes. It may change in the same or opposite directions, with or without time lags (delays) and possibly to a dfferent degree. There should be some funtional mapping from B to A.
3. ... I could say more. From your education, I expect better.