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