| A real estate appraisal is a service performed, by | | | | part of a larger set of transactions in which the |
| an appraiser, that develops an opinion of value | | | | parties had engaged. Another possibility is that a |
| based upon the highest and best use of real | | | | specific buyer would be willing to pay a price |
| property. The highest and best use is that use | | | | higher than the market value. Such situations |
| which produces the highest possible value for the | | | | often arise in corporate finance, as per example |
| property. This use must be profitable and | | | | when a merger or acquisition is concluded at a |
| probable. Also of importance is the definition of | | | | price which is higher than the value represented |
| the type of value being developed and this must | | | | by the price of the underlying stock. The usual |
| be included in the appraisal, ie market value, | | | | rationale for these valuations is that the 'sum is |
| condemnation value, quick sale value, etc. For | | | | greater than its parts', since full ownership of a |
| improved residential property, this value is most | | | | company entails special privileges for the buyer |
| often reported on a standardized form, the | | | | for which he is willing to pay. Such situations arise |
| Uniform Residential Appraisal Report. | | | | in real estate/property markets as well (see |
| In the USA appraisal standards are the province | | | | value-in-use). It is the task of the real estate |
| of the Appraisal Foundation which is chartered by | | | | appraiser/property valuer to judge whether a |
| Congress and periodocally publishes the Uniform | | | | certain price obtained under a certain transaction |
| Standard of Professional Appraisal Practice | | | | is indicative of market value. |
| (USPAP). The USPAP state the minimum | | | | Market value definitions in the US |
| standards an appraiser/appraisal report must | | | | In the US, "Fair Market Value" and "Fair Value" are |
| meet. State licensing was established in the early | | | | commonly used as accounting terms. The |
| 1990s in the wake of the Savings and Loan | | | | equivalent appraisal term is "Market Value." |
| "crisis". Licensure and enforcement are state | | | | (USPAP Advisory Opinion 8.) USPAP defines |
| functions. In addition, there are appraisal | | | | Market Value as "a type of value, stated as an |
| organizations, private not-for-profits, some of | | | | opinion, that presumes the transfer of a property |
| which date back to the Great Depression of the | | | | (i.e., a right of ownership or a bundle of such |
| 1930s, such as the American Society of Farm | | | | rights), as of a certain date, under specific |
| Managers and Rural Appraisers, founded in 1929. | | | | conditions set forth in the definition of the term |
| Others were founded as needed and opportunity | | | | identified by the appraiser as applicable in an |
| arose in specialized fields, such as the Appraisal | | | | appraisal". |
| Institute and the American Society of Appraisers | | | | Forming an opinion of market value is the purpose |
| (founded in the 1930s) and the International Right | | | | of many real property appraisal assignments, |
| of Way Association and the National Association | | | | particularly when the client’s intended |
| of Realtors (after World War II). These | | | | use includes more than one intended user. The |
| organizations all existed to establish and enforce | | | | conditions included in market value definitions |
| standards, but their influence has waned as the | | | | establish market perspectives for development of |
| government increases appraisal regulation. | | | | the opinion. These conditions may vary from |
| In the UK, real estate appraisal is known as | | | | definition to definition but generally fall into three |
| property valuation and a real estate appraiser is a | | | | categories: |
| land valuer or property valuer (usually a chartered | | | | 1) The relationship, knowledge, and motivation of |
| surveyor who specialises in property valuation). | | | | the parties (i.e., seller and buyer); |
| Property valuation in the UK is regulated by the | | | | 2) The terms of sale (e.g., cash, cash equivalent, |
| Royal Institution of Chartered Surveyors (RICS), | | | | or other terms); and |
| a professional body encompassing all of the | | | | 3) The conditions of sale (e.g., exposure in a |
| building and property-related professions. The | | | | competitive market for a reasonable time prior to |
| RICS professional guidelines for valuers are | | | | sale). |
| published in the Red Book. | | | | (Definitions: USPAP 2005.) |
| The reader should be aware that differences in | | | | In the US, a typical definition of market value can |
| nomenclature exist between the different | | | | be found on the FNMA residential appraisal forms, |
| countries. Although the overall concepts are very | | | | as the FNMA 1025, which states the following: |
| similar, the reader should be careful to ascertain | | | | DEFINITION OF MARKET VALUE: The most |
| that the proper nomenclature is being used for | | | | probable price which a property should bring in a |
| their particular area. | | | | competitive and open market under all conditions |
| Types of value | | | | requisite to a fair sale, the buyer and seller, each |
| There are several types and definitions of value | | | | acting prudently, knowledgeably and assuming the |
| sought by a real estate appraisal. Some of the | | | | price is not affected by undue stimulus. Implicit in |
| most common are listed: | | | | this definition is the consummation of a sale as of |
| Market Value – The price at which an | | | | a specified date and the passing of title from |
| asset would trade in a competitive Walrasian | | | | seller to buyer under conditions whereby: (1) |
| auction setting. Market value is usually | | | | buyer and seller are typically motivated; (2) both |
| interchangeable with fair market value or fair | | | | parties are well informed or well advised, and each |
| value. However, the word "fair" is no longer in use | | | | acting in what he or she considers his or her own |
| when describing market value. The legal definition | | | | best interest; (3) a reasonable time is allowed for |
| of market value is usually given by some variant | | | | exposure in the open market; (4) payment is |
| of the following: "The most probable price at | | | | made in terms of cash in U. S. dollars or in terms |
| which a property would trade in an arms-length | | | | of financial arrangements comparable thereto; and |
| transaction in a competitive and open market, in | | | | (5) the price represents the normal consideration |
| which the buyer and seller each act prudently and | | | | for the property sold unaffected by special or |
| knowledgeably and in which the price is not | | | | creative financing or sales concessions* granted |
| affected by any special relationship between | | | | by anyone associated with the sale. |
| them". | | | | '*'Adjustments to the comparables must be made |
| Value-in-use – The net present value | | | | for special or creative financing or sales |
| (NPV) of a cash flow that an asset generates for | | | | concessions. No adjustments are necessary for |
| a specific owner under a specific use. Value-in-use | | | | those costs which are normally paid by sellers as |
| is the value to one particular user, which may be | | | | a result of tradition or law in a market area; these |
| above or below the fair market value of a | | | | costs are readily identifiable since the seller pays |
| property. | | | | these costs in virtually all sales transactions. |
| Investment value - is the value to one particular | | | | Special or creative financing adjustments can be |
| investor, which may be above or below the fair | | | | made to the comparable property by |
| market value of a property. | | | | comparisons to financing terms offered by a third |
| Insurable value - is the value of real property | | | | party institutional lender that is not already |
| covered by an insurance policy. Generally it does | | | | involved in the property or transaction. Any |
| not include the site value. | | | | adjustment should not be calculated on a |
| It is important to distinguish between market | | | | mechanical dollar for dollar cost of the financing or |
| value and price. A price obtained for a specific | | | | concession but the dollar amount of any |
| property under a specific transaction may or may | | | | adjustment should approximate the |
| not represent that property's market value: | | | | market’s reaction to the financing or |
| special considerations may have been present, | | | | concessions based on the appraiser’s |
| such as a family relationship between the buyer | | | | judgment.(FNMA form 1025, March 2005.) |
| and seller, or else the transaction may have been | | | | |