Ch. 13 Types of Value

What is value in use?

The value of a property assuming a specific use, which may or may not be the property's highest and best use on the effective date of the appraisal. Value in use may or may not be equal to market value but is different conceptually. Consider the value of an asset at the end of its useful life.

What is salvage value?

The value of an asset estimated with regard to the specific circumstances under which the asset is sold. Salvage value describes the value of an asset that has reached the end of its economic life for the purpose it was made. The asset may still have value for an alternative use or for recycling.

The market value definition says that __________ is allowed for exposure in the open market.

a reasonable time

An artificial amount that is constructed using accounting procedures is called ________ value.

book

"The monetary relationship between properties and those who buy, sell, or use those properties" is the definition of

value

A property owner purchases a lot for $100,000 and pays $400,000 to have a home constructed on it. When it is completed, the owner sells the home for $560,000. The appraiser for the buyer's mortgage company appraises the home at $525,000. The appraiser's opinion of $525,000 represents the _________ of the property.

value

What type of value is based on a specific use, which may or may not be the property's highest and best use?

value in use

What is market value?

"The most probable price that the specified property interest should sell for...." What if a property could sell 10 times over, what would be the most likely price? That's market value. "...in a competitive and open market under all conditions requisite to a fair sale..." This means the property must have an adequate exposure to the market. "...conditions requisite to a fair sale..." Once it is competitively marketed, the buyer and seller enter into a logical bargaining process. "...the buyer and seller each acting prudently, knowledgeably, for self-interest, and assuming that neither is under duress..." "as of a specified date." Market value always has to be pinned to a specific point in time.

What are some examples of some causes of duress that would make a transaction not considered arm's length?

-Job transfer -Death of a spouse or close relative -Sale to a relative -Sale to a friend or business partner -Sale by an unknowledgeable buyer or seller -Desire to buy and control an adjoining property -Desire to purchase a property for an assemblage -Sale prior to impending foreclosure -Sale under threat of condemnation -Sale prior to proposed zoning change -Sale influenced by tax considerations (it may have been part of a tax-free exchange)

What are some sources that an appraiser may rely on to develop an opinion of reasonable exposure time?

-statistical information about days on market -information gathered through sales verification -interviews of market participants -information from data collection services

What is an arms length transaction?

A transaction between unrelated parties under no duress. This means the two parties are standing at arm's length and negotiating freely with no attachments.

What is insurable value?

A type of value for insurance purposes. the value of the part of a property that would be replaced in the event of a total loss by a catastrophic event. Usually this means the building improvements only and does not include the land or other site improvements such as a well or septic system. This value is based on replacement or reproduction cost.

What is intangible value?

A value that cannot be imputed to any part of the physical property, e.g., the excess value attributable to a favorable lease or mortgage, the value attributable to goodwill. An example of this would be a long term lease for a property at $10 per square foot, when the market rate is now $15 per square foot.

What is investment value?

An investor hires you and poses the question, "How much can I afford to pay for that property -- assuming only a 10% down payment, tax free annual net income, and the ability to recapture my investment over a holding period of 10 years?" The answer to that question would be investment value; that is, what the property would be worth to that one specific investor, in order to achieve his personal investment goals. It may differ substantially from market value.

What is assessed value?

Assessed value is merely a figure that the assessor places on the tax roll for his or her own purposes. It may have no relationship to a property's current market value.

What is cost?

Cost is related to production. It delineates what it would cost to produce a structure brand new. Cost has a price. It may or may not have a direct relationship to value.

What is reasonable exposure time?

Exposure time is a retrospective opinion developed by the appraiser. It answers the question, "if this property had been placed on the market at some time in the past, how long would it have taken to obtain an agreement of sale on the effective date of the appraisal?" An appraiser might use the days-on-market for other similar properties in the market to support his or her opinion of reasonable exposure time. The appraiser must state this opinion in their report.

True or False? We can assume that cost is equal to value.

False It is possible that cost and value could possibly equal the same amount in a particular situation. However, this happens even less frequently than with price and value.

Define market value

If we have a normal buyer and seller acting in a normal fashion and the property sells under typical conditions in a reasonable time after having a normal exposure to the market and through typical financing means - then it will result in market value. It can only result from an arm's length transaction in which the two parties are acting calmly and rationally with no ulterior motives and acting under no undue duress.

What is public interest value?

Monetary worth attributed to features that have no measurable worth in the market but may benefit the public or a specific segment of the public. While contrary to the theory of market value, public interest value is sometimes used to rationalize payment of a price that exceeds market value based on benefits to society resulting from: increased ad valorem tax revenues, benefits of increases or changes in the value of surrounding property values, aesthetics, broad social benefits, and other factors.

What is price?

The amount asked, offered, or paid for a property. Once stated, price is a fact, whether it is publicly disclosed or retained in private. Because of the financial capabilities, motivations, or special interests of a given buyer or seller, the price paid for a property may or may not have any relation to the value that might be ascribed to that property by others.

What is book value?

The asset's cost at acquisition, reduced by the amount of accumulated depreciation on the asset. This is an artificial amount that is constructed using accounting procedures. It is closer to cost than value.

What is going concern value?

The market value of all the tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate; more accurately termed the market value of the going concern. There may be fixtures and business equipment, plus there may be customer loyalty and perhaps an assumable inventory and customer list. The sale of a restaurant often will include land, building, equipment and goodwill. Without the equipment and goodwill, the market value of the real property only could be very different from the going concern value.

What is value?

The monetary relationship between properties and those who buy, sell, or use those properties. Value expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property at a given time in accordance with a specific definition of value. In appraisal practice, value must always be qualified - for example, market value, liquidation value, or investment value.

What is value in exchange?

The value, in terms of cash, of a property which is bartered for another asset or assets, cash being the yardstick by which the comparative value of each can be assessed. Market value is an example of value in exchange. It gets back to the historic system of barter or exchange. How much of something else (money) is a party willing to give up to acquire a piece of real estate in exchange.

What is liquidation value?

This is a legitimate type of value that can be developed by an appraiser. It is definitely not market value. The seller wants to dump the property and get what they can, quickly. It states in the definition that there will be a severely limited marketing period and that the seller is under "extreme compulsion to sell". Examples where an appraiser may be asked to do this: -A client has recently taken title to a property at foreclosure, they may need to know what kind of price they can expect when they sell in a restricted marketing period. -A client may be about to be foreclosed and wants to know how much a quick sale to avoid a foreclosure might bring.

True or False? Market value must be as of a specific point in time.

True

The value created by a proven property operation; considered as a separate entity to be valued with a specific business establishment is the definition of _______________ value.

going concern Going concern value encompasses all of the tangible and intangible assets of a business such as an established restaurant.

A value that cannot be imputed to any part of the physical property is called ___________ value.

intangible

An appraisal for insurable value on a single-family home usually does not include the ____.

land

A bank acquires a property at foreclosure, and they need to sell it very quickly. They ask an appraiser to provide them a value opinion based on a restricted marketing time, and considering they are under extreme compulsion to sell. What type of value is this client asking for?

liquidation value

Most appraisals are prepared for the purpose of ____ value.

market

The most common type of value sought by appraisers is

market value

Which type of value begins with "the most probable price that a property should sell for..."

market value

Appraisers need to carefully read the definition of value being used in their appraisals in order to determine if an ____ is necessary in the assignment.

opinion of reasonable exposure time Definitions of market value differ based on who the appraisal is being written for.

"The amount a particular purchaser agrees to pay and a particular seller agrees to accept under the circumstances surrounding their transaction" is the definition of

price

"The amount asked, offered, or paid for a property" is the definition of

price

A property owner purchases a lot for $100,000 and pays $400,000 to have a home constructed on it. When it is completed, the owner sells the home for $560,000. The appraiser for the buyer's mortgage company appraises the home at $525,000. The sales contract for $560,000 represents the __________ of the property.

price

USPAP says "When exposure time is a component for the definition of value being developed, the appraiser must also develop an opinion of ___________ time linked to the value opinion."

reasonable exposure

Which of these property types would NOT typically be appraised based on a going concern value?

single-family home