Market value

Market value or Open Market Valuation (OMV) is the estimated amount which a property might be expected to exchange for on the date of valuation after the property has been sufficiently exposed to potential buyers, where both the buyer and seller are independent parties acting in what they consider their own best interests and are on an equal footing, with each acting sagaciously and fully-informed, without any form of compulsion. Or simply put, it is the price an asset can be expected to exchange for in a competitive auction setting.

For market value to be determined there must be a willing seller, and before the valuation date there must have been an adequate period of time allowed for proper marketing of the asset for an agreement to be reached on the terms and price. The amount of time given will depend on the state of the market and the nature of the asset.

Market value also demands that circumstances such as the level of values and the condition of the market on an earlier pre-determined date of completion of the transaction remain the same as on the valuation date. Another bid by a buyer with a special interest must not be taken into account and both the buyer and the seller must have completed the transaction acting knowledgeably and sagaciously, with the buyer having no obligation whatsoever to the seller.

Other terms such as fair value, open market value, or fair market value are often used in place of market value, however, these terms are defined differently in various standards and do not always apply to the same circumstances.

The market value of a property is typically determined by a number of factors such as the interest held, the condition and type of the property, the reason for the valuation, and the nature of the market at the date of valuation.

Distinction between market value and market price

Market value is not to be confused with market price. While market price is simply the amount one can transact for, market value is the real latent value. Market value is often cited in situations of disequilibrium or in inefficient markets where the actual underlying value is not reflected in the ruling market prices. Market price can only be in equilibrium with market value when the market is efficient with information and rational expectations prevailing.

Distinction between market value and fair value

The difference between market value and fair value is that while fair value is dependent on the parties involved, market value is not. Fair value is concerned with coming to a price that is equitable between two particular parties, considering the merits and demerits that each party will obtain from the transaction. On many occasions, market value will comply with these criteria but not necessarily in every situation. Market value aims to reach an objective estimated price which knowledgeable, reasonable, and willing sellers and buyers would accept and pay for an asset. While fair value attempts to bring in the idiosyncrasies of both parties, market value is a more theoretical approach.

Application in real estate

Market value is most commonly used in real estate appraisal as a result of the transactional and informational inefficiency of real estate markets. Real estate markets tend to be affected by protracted intervals where the market experiences disequilibrium as may be caused by contamination situations or any other condition capable of causing disruption to the market.

An appraisal would normally be performed with certain assumptions concerning the market having been factored in, with those assumptions embodying the definition of the specific value used to complete the appraisal. In the United States, the federal, state, or local laws may mandate certified or licensed appraisers to ensure all appraisals comply with the Uniform Standards of Professional Appraisal (USPAP). USPAP requires an appraisal to include an estimated exposure time as well as a detailed analysis of highest and best use, if the market value is the definition to be applied.

This does not imply that USPAP requires every single real estate appraisal to be performed using the market value definition. There are often situations where an appraiser would have to perform a property valuation using other value definitions besides market value. In cases where a value definition besides market value is to be used, USPAP only demands that the licensed appraiser present the definition of the specific value used. It is not sufficient for the appraiser to provide the definition of the value alone as the definition has to be properly cited.

Other value definitions used in real estate

In the United States, market value is needed for all mortgage transactions regulated at the federal level and courts in the U.S. have accepted it as valid. While this means market value is the most prevalent kind of value used in real estate, certified appraisers may use numerous other value definitions as the situation demands.

Liquidation value

Liquidation value refers to the price a particular interest in a piece of real estate would most likely bring under a specific set of conditions. One of the conditions is a specified period must be allowed for marketing. Also, a sale must be completed within a future marketing timeframe as indicated by the client, and the price must be representative of the normal consideration for the property and must not be affected by special financing concessions, among others. The property’s interest is subject to the prevailing market conditions.

Going concern value

The going concern value is a combination value which results when a business valuation appraiser and a real estate appraiser work together to present the value of a business and its real estate. The going concern value is not often the same as the sum of the separate values.

Use value

Use value is not as concerned about the highest and best use of a property as it is about the specific use for the property. For instance, in some cases, farmland will be subjected to agricultural use appraisals.

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Published on 7th June 2017

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