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Topic 16.2: Concept of Value

Learning Objectives

After successfully completing this topic, you will be able to
• distinguish among the various types of value,
• define market value and describe its underlying assumptions,
• distinguish among value, price and cost,
• describe the four characteristics of value, and
• distinguish among the principles of value.

Concepts of Market Cost/Price/Value

Value is not a fact. It is the most probable price that a property should bring in the market in a fair sale, with knowledgeable buyers and sellers acting without pressure or undue stimulus.
Price is the consideration paid from a buyer to a seller for real property in an actual transaction. Price is a historical fact that can exist only after the specific interaction of two persons or entities.
Cost is the amount of money required to improve a parcel of real estate. Builders will build only if the cost to build an improvement is less than the resulting market value. If a builder builds a house that costs $300,000, but similar houses in the neighborhood are selling for $250,000, the consumer will be unwilling to pay the builder what the house cost.

Many types of value apply to real estate

Appraisers may be asked to estimate:

  • assessed valueused for property tax purposes. County property appraisers regularly appraise property to be used as the basis for taxes. Licensees or certified appraisers may also be called upon to appraise the property for use in requesting a value adjustment for taxes.
  • insurance valuegenerally an estimate using the cost approach that insurance companies may use to measure replacement cost.
  • going-concern valuethe value of a business that is profitable. A restaurant that is making a profit is called a “going concern.” If the restaurant closes, it’s worth only what the land and the used personal property brings.
  •  valueassumes a quicker than normal sale. The liquidation value of a business that has failed is usually lower. For example, a restaurant with outdated equipment that is closing is unlikely to recover its investment. This is different than going concern value. If a very successful restaurant is to be sold, investors are likely to pay more than the value of its assets alone.  
  • investment value—the amount an income property is worth to a particular investor based on that investor’s required rate of return. It is a subjective value and not considered as market value. 
  • salvage valuethe value of an improvement at the end of its useful life.
  •  valuethe value most often sought by an appraiser. See the next section for more information about market value.

Definition of Market Value

“Market value is the most probable price that 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, 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 typically motivated;
> both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
> a reasonable time is allowed for exposure in the open market;
> payment is made in terms of cash in U.S. dollars or in 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.”

Fannie Mae B4-1.1-01

Characteristics of Value

There are four essential factors for a parcel or real estate to have value.
Demand – Desire along with the economic means to purchase. A person may desire to live in a particular house, but that won’t matter if the person does not have the necessary financing to buy the house.
Utility – Must be useful and able to fill a need. Real estate needs to provide benefits to the owner.
Scarcity – If there is excess supply on the market, the value falls. When there are fewer parcels of desirable property for sale, the value will be higher.
Transferability – The legal ability to convey title. Property will not have market value unless an individual can buy it and transfer title into his or her name.