As the markets change, emphasis is placed on differing definitions of value. Traditionally appraisers estimate market value but in other instances, other values are estimated. When capital markets change, exposure and marketing times extend, and supply and demand for various property types move into disequilibrium, a refocusing of value may be appropriate.
It is important for the reader of appraisal documents to understand the differences in values presented in various documents. Values are different. And they are much different in changing markets. Sometimes readers do not understand the differences and are surprised by the results only from a quick glance at the value conclusion presented in the appraisal. A working understanding of the values presented can allay some of the confusion. This short commentary provides some working differences such that the reader can understand what is being estimated in an appraisal.
As a summary, we start with market value. Market value as defined in the Appraisal of Real Estate, 15th edition, is defined as:
The most probable price as of a specified date in cash or in terms of equivalent to cash or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale with the buyer and seller each acting knowledgeably, and for self-interest, and assuming that neither is under undue duress.
When all the conditions noted are present (e.g., cash transaction, knowledgeable participants, reasonable exposure in marketing times, and where neither party is under duress) market value has been achieved. But what if some of these conditions are not met? Although there are many types of value, this presentation will focus on two others: liquidation value and disposition value.
Property sales in distressed markets many times do not meet the requirements fundamental to the definition of market value. Sales under a disposition premise or a liquidation premise are such examples. These two are similar in definition to but differ at three critical issues when compared to market value. These three are:
In a liquidation value scenario, note the following:
- Consummation of a sale within a short time period.
- The seller is under extreme compulsion to sell.
- A normal marketing effort is not possible due to the brief exposure time.
Under a disposition value, note the following also:
- Consummation of a sale within a future exposure time specified by the client.
- The seller is under compulsion to sell.
- An adequate marketing effort will be made during the exposure time specified by the client.
In any regard, the market value definition is not met by either the liquidation value or disposition value fundamentals. In both liquidation and disposition values are not market-based with reasonable exposure to the market where the buyer/seller is not under duress. Many times, clients will request a market value conclusion AND one of the other two. The distinction is duress. The reader of appraisals must understand the distinction between market value and these other values. The implication with liquidation or disposition values is a forced action by varying degrees.