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