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Definitions of Value
Market Value is the most probable price, as of a specified date, in cash, or in terms 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 prudently, knowledgeably, and for self-interest, and assuming that neither is under duress.
The USPAP of The Appraisal Foundation require that the following items directly related to the market value definition be included in every appraisal report:
- Identification of the specific property rights to be appraised;
- Statement of the effective date of the value opinion;
- Specification as to whether cash, terms equivalent to cash, or other precisely described financing terms are assumed as the basis of the appraisal;
- If the appraisal is conditioned upon financing or other terms, specification as to whether the financing or terms are at, below, or above market interest rates and/or contain unusual conditions or incentives.
The terms of above- or below-market interest rates and/or other special incentives must be clearly set forth; their contribution to, or negative influence on, value must be described and estimated, and the market data supporting the value estimate must be described and explained.
Market price is the amount actually paid, or to be paid, for a property in a particular transaction. Market price differs from market value in that it is an accomplished or historical fact, whereas market value is and remains an estimate.
Market price involves no assumption of prudent conduct by the parties, of absence of undue stimulus or of any other condition basic to the market value concept.
Use value is the value a specific property has for a specific use. In estimating use value, the appraiser focuses on the value the real estate contributes to the enterprise of which it is a part, without regard to the property's highest and best use or the monetary amount that might be realized from its sale.
Many states require agricultural use appraisals for farmland for property tax purposes rather than value estimates based on the highest and best use.
The current IRS regulation on estate taxes allows land under an interim agricultural use to be valued according to this alternative use even though the land has development potential.
While use value focuses on the specific use of a property, investment value represents the value of a specific investment to a particular investor.
As used in appraisal assignments, investment value is the value of an investment to a particular investor based on his or her investment requirements. In contrast to market value, investment value is value to an individual, not necessarily value in the marketplace.
Since real estate is a long-term capital asset capable of producing money or amenity income over an extended period of years, its value can also be regarded as the present worth of anticipated future benefits. The present worth of those benefits to a specific purchaser or investor is investment value, which can be measured by the appraiser. The present worth to a specific owner or user is value in use.
Use value is approached from the viewpoint of the owner-user. It is the amount of money the owners of rights in realty must be offered or paid to persuade them to give up those rights.
Market value and investment value, on the other hand, are viewed from the position of the potential buyer. It is the maximum price that an informed purchaser would pay under the stipulated conditions.
Public Interest Value
Public interest value is a general term covering a family of value concepts that relate the highest and best use of property to non-economic uses such as conservation and preservation.
Insurable value is based in the replacement and/or reproduction cost of physical items that are subject to loss from hazards. Insurable value is the portion of the value of an asset or asset group that is acknowledged or recognized under the provisions of an applicable loss insurance policy.
Assessed value refers to the value of a property according to the tax rolls. Assessed value may not conform to market value, but it is usually calculated in relation to a market value base.
The value of real property reflects and is affected by the interaction of four basic forces that influence human activity:
- social trends,
- economic circumstances,
- governmental controls and regulations, and
- environmental conditions.
The interaction of these forces influences the value of every parcel of real estate in the market. The appraiser must analyze trends in the forces that influence value.