Appraisers spend their careers estimating market
value. When appraisers and clients begin to discuss what is actually meant
by "market value," however, it becomes apparent that not everyone
is on the same page. Because it is at the heart of what we do, it is useful
for us to state clearly what the term means.
Market value is the price that we estimate a property will likely achieve
in a hypothetical sale on the appraisal's effective date after normal exposure
to potential buyers. (A more detailed definition promulgated by the courts
or government is included in every appraisal report.) The idea is that
you put your property on the market in the hands of a competent broker.
You leave it there for perhaps several months. You accept the highest offer
you get that does not require you to do anything special, like take back
a mortgage. You wait two months for the buyer to get financing, and then
you sit down and close. Note that this scenario presumes a sale on an effective
date usually today or in the recent past; this implies that the marketing
period began perhaps six months ago so that the closing can happen now.
Clients who want to know what their property will bring if they begin marketing
now for a closing down the road need to discuss with their appraiser their
need for a future value and not a value today. The difference in dates
can have considerable impact in markets that have swung by as much as 35%
This definition is simple enough. It conforms to the unspoken understanding
most appraisers and clients have as to purpose. But simple things have
a way of becoming complicated. Like a well intentioned bill making its
way through Congress, it grows so laden with riders that it becomes something
hard to wholeheartedly support.
Take the case of illegal uses. The formal procedures of valuation require
that the use that produces the value be legal. Reasonable enough; but what
do we do about an illegal mother in law apartment that boosts the value
of a house? One appraiser, working for a bank, ignores the apartment and
reports a low value. Another, working for the owner, takes a more realistic
tack. One is the value in the world we all live in, the other the value
in a world where all laws are enforced. Two values for one house and a
world of confusion for those who read our reports.
A second problem is distortion for the sake of placating the client.
When the news appraisers report turns grim, appraisers may be inclined
to change the definition to allow rosier reporting. Lately, with the commercial
market in a tailspin, some have argued that the value we report should
be a longer term or "inherent" value. Under this theory, we abandon
the concept of a standard marketing period measured in months. When the
market is on a wild uphill ride, we should temper our appraisals with caution
to protect our clients from their own excesses. When it is down, we should
look to the day years from now when the market is in recovery and report
that, and not today's prices, as the value. The problem here is that there
is nothing inherent about value. Value is a concept imposed by people and
is subject to all the vicissitudes of people's changing perceptions. There
may be a need for a long term look at value that smooths out the ups and
downs, but to practice that and call it estimating market value is to badly
mislead clients who believe that all we are doing is estimating price,
Eskimos have a variety of words for snow. Value is to appraisers what
snow is to Eskimos, and we would do well to be as creative. Liquidation
value, investment value, insurable value, and going concern value are all
terms that are self defining and are distinct from what is discussed above.
To these we might add future value, long term value, and legal use value.
In the meantime, clients are best advised to be certain that they and the
appraisers they hire share the same concept of purpose.
Eric T. Reenstierna, MAI