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.

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.