You’ve probably been asked about the difference between “market value and appraised value” by clients seeking a mortgage. However, from the perspective of the valuation profession, this isn’t an accurate question. We don’t provide an appraised value of a property. Instead, we provide an informed, objective opinion of the value of the property based on several factors and criteria as well as the type of value we’re asked to provide. Learn more about the different appraisal values and the factors that go into each.
Summary
Value in real estate is an opinion on a property’s worth influenced by market conditions and perceptions, distinct from price and cost. It includes various types, such as market value and intangible value, each serving different appraisal and financial purposes.
Considering a new career? Learn if an appraisal career is right for you with our free ebook, How to Become an Appraiser!
What is value?
Before we look at different types of appraisal values, including market value and assessed value, it’s important to look at the word’s definition within context of real estate appraisals. Many people mistakenly tie value to cost, treat it as a fact, or oversimplify it. However, in real estate appraising, value is multifaceted and fundamentally an opinion.
Let’s consider an analogy using a vintage car. To one person, the car might just be an old vehicle, appreciated for its design but nothing more. To another, it could be a prized possession, evoking memories of family road trips and cherished moments. The price someone is willing to pay for that car can vary dramatically based on these individual perceptions and experiences.
Understanding value is tied to three factors:
- As an economic concept: Value expresses an economic concept—an opinion of the worth of a property at a given time, according to a specific definition of value. In appraisal practice, value must always be qualified, whether it be market value, liquidation value, or investment value.
- Market trends and conditions: Value is tied to the actions and beliefs of buyers and sellers, and we typically measure that value in dollars. But remember, it’s always tied to a specific point in time. Today’s hot property could cool down tomorrow, or vice versa. Value is a moving target, shifting with market trends, economic changes, and personal circumstances.
- Opinion of the worth of the property: Value is an opinion of the worth of a property, not a fact. Appraisers provide an informed opinion on what a property is worth at a specific moment, helping stakeholders navigate the dynamic world of real estate.
Cost, price, and value in real estate appraisal
Price, cost, and value are terms often used interchangeably, but they have distinct meanings in the context of real estate. Price vs. Value Price is the amount of money asked, offered, or paid for a property and once a price is stated, it becomes a recorded piece of data. However, this price can vary significantly based on the financial capabilities, motivations, or special interests of a buyer or seller.
Value, on the other hand, represents an opinion of what a property is worth at a given time. It’s an economic concept that appraisers use to estimate what the price would likely be under normal market conditions. While price and value can coincide in certain transactions, they are not inherently the same. Price is a one-time event from a single transaction, while value reflects market trends and buyer behavior.
Cost vs. Value
Cost is another important but distinct concept. It refers to the total dollar expenditure required to create, produce, or replace. Cost is related to production and is typically a fixed figure, such as the cost to build a new structure or replace an existing one though it can be a factual historical amount or an estimate
However, cost does not necessarily equate to value. For instance, spending $50,000 to install a swimming pool doesn’t mean your property’s value will increase by the same amount. The added value depends on various factors, including location, market demand, and the preferences of potential buyers. Therefore, while cost, price, and value can intersect, they each represent different aspects of a property’s financial and market reality.
Understanding Market Value
Market value is the most frequently sought value in real property appraisals and can have various definitions. Most often, it is defined as the most probable price a property should sell for under typical conditions. This price assumes a reasonable exposure time on the market, with both buyer and seller acting prudently and without duress.
Market value is not about the highest or lowest possible price but rather the most realistic price based on standard market practices. It often assumes the transaction will be in cash or terms equivalent to cash, ensuring the value estimate is not distorted by unusual financing or sales conditions.
To determine a credible opinion of a property’s market value, appraisers must consider several factors, including the relationship and knowledge of the buyer and seller, the terms of the sale, and the property’s exposure time in the market. The ideal transaction is an arm’s-length transaction, where both parties are unrelated and act in their own best interests. This scenario ensures the transaction reflects market value without undue influence or pressure.
In essence, market value represents an ideal transaction under fair and typical conditions, balancing knowledge, motivation, and exposure time on the market. While real-world transactions may not always meet this ideal, appraisers use these principles to estimate a property’s market value as credibly as possible, assuming the sale is conducted in cash or on terms equivalent to cash.
Other Appraised Values
While most appraisals aim to determine an opinion on market value, not all appraisals are centered on this. Depending on the specific appraisal assignment, different types of value may be considered. Let’s examine eight different types of value and provide a high-level overview of each.
Assessed Value
Assessed value is a property value determined by local government agencies for taxation purposes. Unlike market value, which reflects the price a property might fetch in a competitive real estate market, assessed value is derived through mass appraisal techniques used to value large groups of properties systematically.
The assessed value is established by analyzing numerous property sales within defined appraisal areas possibly containing hundreds of sales. By using a mass appraisal model, which incorporates these sales data, officials estimate property values on a broad scale. To refine this estimate, a more focused review is conducted using sales from a smaller geographical area closely associated with the property in question.
The mass appraisal process involves applying “factors” to adjust for local conditions and specific property characteristics such as location, size, quality, condition, and amenities. This statistical analysis helps in setting a property’s assessed value, which can differ from market value due to its basis in standardized, mass appraisal methods rather than individual market transactions.
Investment Value
Investment value is the worth of a property to a particular investor or group of investors, based on their specific investment criteria and objectives. This value can differ from market value, which reflects what a property would likely fetch in a typical market transaction under standard conditions.
Consider a commercial building that, according to market value, is worth $750,000. However, an investor group with a focus on acquiring properties that generate a certain level of annual rental income might determine that this building is worth $850,000 to them, based on its potential to meet their income requirements and investment strategy. This investment value reflects what the property is worth to that specific investor group, considering their unique financial goals and expectations, which may differ significantly from the broader market value.
Insurable Value
Insurable value is a type of value specifically used for determining the insurance coverage needed for a property. It represents the cost to replace or reproduce the building improvements in the event of a total loss, such as from a fire, hurricane, or other catastrophic event.
Unlike market value, which reflects what a property might sell for in the open market, insurable value focuses solely on the cost of rebuilding the structure and improvements. It’s important to note that while market value considers the overall value of a property including the value of the land (or improved site), insurable value is strictly concerned with the replacement or reproduction cost of the building and improvements.
Value in Use
Value in use refers to the value of a property based on a specific use, which may or may not be its highest and best use at the time of appraisal. This type of value can differ from market value conceptually.
For example, consider a specialized medical facility designed exclusively for a particular type of treatment. The facility might have significant value for its intended medical use, but the property’s value could be limited to a niche market. When appraising such a property, the appraiser must evaluate whether there is still demand for that specific use and how it aligns with current market conditions and zoning regulations.
Intangible Value
Intangible value represents the worth of non-physical assets that enhance the overall value of a business or property. Unlike tangible assets, intangible value includes elements such as goodwill, brand recognition, patents, intellectual property, and customer relationships. This type of value focuses on evaluating the impact of these non-physical factors on a business’s success and is commonly used in business valuations and investment analyses.
Market Value of a Going Concern
Market value of a going concern refers to the value of a fully operational business, including its tangible and intangible assets. This encompasses not just the real estate and physical equipment, but also financial assets, goodwill, and other intangible elements that contribute to the business’s ongoing success.
For example, consider a small manufacturing company. The market value of this going concern would include the factory building, machinery, inventory, and customer base, as well as factors like brand reputation and established business relationships. The inclusion of these intangible assets can significantly impact the overall value.
Without accounting for the machinery and customer goodwill, the market value of only the real property would be much lower than the combined market value of the entire business operation. This concept, previously known as “going concern value,” is now more broadly referred to as market value of a going concern.
Book Value
Book value refers to the recorded value of an asset or business as listed on financial statements. From an accounting perspective, it represents the asset’s cost when acquired, minus any accumulated depreciation or amortization. Overall, book value is a figure derived from accounting practices and is more related to historical cost than to the current market value of an asset or business.
Liquidation Value
Liquidation value is the estimated price a property or asset would bring under urgent conditions, such as a forced sale or rapid liquidation. This type of value assumes that the sale occurs quickly, often due to the seller’s pressing need to sell, and the property is sold under less-than-ideal market conditions.
For example, if a homeowner is facing foreclosure and needs to sell their property quickly to avoid further financial trouble. The property is in a neighborhood with a relatively stable market, but due to the urgency of the situation, the seller cannot afford to wait for a traditional sale.
In this scenario, the liquidation value would be the estimated price the property might fetch if sold rapidly under these conditions. The sale would likely occur at a discounted price compared to the property’s market value.
Learn more about appraised values with CE courses
For appraisers, the concept of value is complicated, but McKissock can provide you with the clarity you need through our appraisal CE courses. To learn more about value and how changes in the market can affect value, check out the following courses:
- Land and Site Valuation
- Market Disturbances – Appraisals in Atypical Markets and Cycles
- The Cost Approach
With an Unlimited CE membership, you’ll get full access to our entire continuing education catalog, plus our Learning Library with over 400 resources, including checklists, webinars, step-by-step guides, and so much more!
