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  • BASIC VALUATION DEFINITIONS

Value Designations

There are many different designations or definitions of value. They may be divided into the following two main classifications:

  • Utility value, which is value directed toward a particular use. This frequently is termed subjective value and includes valuation of amenities which attach to a property or a determination of value for a specified purpose or for a specific person.
  • Market value, which represents the amount in money (cash or the equivalent) for which a property can be sold or exchanged in prevailing market conditions at a given time or place as a result of market balancing. It may be based on a "willing buyer" and "willing seller" concept. This is frequently termed the objective value, since it is not subject to restrictions of a given project.

Appraisers carefully define the value being sought. Types of values are Liquidation Value, Insurable Value, Investment Value and, of course, Assessed Value (for taxation).

The real estate market sometimes places great importance on real estate financing terms. Market Value might be estimated for specific financing arrangements: seller carry-back, balloon payments, renegotiable mortgages or other "creative" financing techniques.

Market Value Defined

In appraisal practice, the term Market Value is defined by agencies that regulate federal financial institutions in the U.S. That definition is the one found in USPAP and is given as:

"The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus."

Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  • buyer and seller are motivated;
  • buyer and seller are well informed or well advised and acting in what they consider their best interest;
  • a reasonable time is allowed for exposure in the open market;
  • payment is made in terms of cash in United States dollars or terms of financial arrangements comparable thereto; and
  • the price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

(Source: Uniform Standards of Professional Appraisal Practice, Appraisal Foundation, 2000 Edition,.)

Legal Definition

The legal definition of Fair Market Value under State law is found in the Code of Civil Procedure, Section 1263.320, as follows:

"The fair market value of the property is the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available."

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