Market Value / Fair market value

The most probable price which 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 and knowledgeable, 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:

1. buyer and seller are typically motivated
2. both parties are well-informed or well-advised, and acting in what they consider their own best interests
3. a reasonable time is allowed for exposure in the open market
4. payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto
5. 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.

Market Value Comments: The factors of utility, scarcity, desire and effective purchasing power are apparent in the definition. The implication that the buyer and seller are working under equal pressure is seldom completely true, although typical motivation for each does imply a reasonable balance for a market value transaction. Market prices do not necessarily follow all of these concepts and are often affected by salesmanship and the urgency and need of the buyer and/or seller. The central difference between market price and market value lies in the premise of knowledge and willingness both of which are contemplated in market value, but not market price. Stated differently, at any given moment of time, market value denotes what a property is actually worth under certain specified conditions, while market price denotes the actual price.

Appraisal

"Appraisal" or "real estate appraisal" mean an analysis, opinion, or conclusion as to the value of identified real estate or specified interests therein performed for compensation or other valuable consideration.

Definition of Highest and Best Use

The reasonably probable and legal use of vacant land or an improved property which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability.

Cost Approach to Value

The cost approach is an indication of value, which combines the value of the land under the highest and best use, plus the depreciated replacement or reproduction cost of the improvements. Depreciation is the loss in value due to wear and tear, design and plan, or neighborhood influences. The cost approach is based upon the principle of substitution which hold that a purchaser would most likely not pay more for a property than the cost of obtaining an equally desirable substitute site, plus the cost of replacing equally desirable and useful improvements thereon, assuming no costly delay is involved in making the substitution.

Income Approach to Value

In appraisal terminology with regard to income properties, value is normally defined as "the present worth of future rights to income". For this reason, the economics are of prime importance in estimating the value of income producing property.

The value opinion using the income approach is derived by estimating the market rent of the property (in other words, that income ascribable to a property improved to its highest and best use), deducting all pertinent expenses (experienced under competent management), and capitalizing the resulting net income with an appropriate capitalization rate to obtain the present value of forecasted income stream. This method provides an objective opeion of what a prudent, informed investor would pay for the subject property.

Sales Comparison Approach to Value

The sales comparison approach, or market approach, is a method of concluding an opinion of value whereby the subject property is compared with similar properties that have sold recently representing bona fide arm's length, or for which listing prices or offering figures are known. Comparable sales are analyzed and adjusted for property rights conveyed, conditions in the market, terms of financing, unusual conditions of sale, differences in physical characteristics, and location. The adjusted sales price should be what the comparable property would have sold for if it had possessed similar characteristics, and location. The information on typically comparable properties is used, and comparisons are made to demonstrate a probable price at which the subject property would be sold if it had been offered on the market in a reasonable marketing period. This approach works best in an active market where these prices serve as good indicators of the most probable selling price of the subject property as of the valuation date.