Market Value

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% a year.

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, today.

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

The Reenstierna Associates Report is published as a service to the clients of Eric Reenstierna Associates and other real estate professionals. The views expressed are those of the articles' authors and do not necessarily reflect those of other members of the organization. Copyright 1993. All rights reserved.

Eric Reenstierna Associates
24 Thorndike Street
Cambridge, Massachusetts 02141
(617) 577-0096

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