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.
• 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.
“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:Fannie Mae B4-1.1-01
> 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.“
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.