Market value
Encyclopedia
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value
or fair market value, although these terms have distinct definitions in different standards, and may differ in some circumstances.
transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion."
Market value is a concept distinct from market price
, which is “the price at which one can transact”, while market value is “the true underlying value” according to theoretical standards. The concept is most commonly invoked in inefficient markets or disequilibrium
situations where prevailing market prices are not reflective of true underlying market value. For market price to equal market value, the market must be informationally efficient and rational expectations
must prevail.
Market value is also distinct from fair value
in that fair value depends on the parties involved, while market value does not. For example, IVS currently notes fair value "requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction. Although market value may meet these criteria, this is not necessarily always the case. Fair value is frequently used when undertaking due diligence in corporate transactions, where particular synergies between the two parties may mean that the price that is fair between them is higher than the price that might be obtainable in the wider market. In other words "special value" may be generated. market value requires this element of "special value" to be disregarded, but it forms part of the assessment of fair value.
Any whatever article should be explained in this context, because people pay what they want in spite of whatever advice.
Local, regional, national, international? Considering that Market Price is what people agree to pay for something at a given moment at a given place, it is important to underline the importance of the time and place range wherein sellers and buyers meet. The Local and Instant Market Value of a specific item is exactly the same as the Local Market Price. And if several people want the same thing while there is not enough for everybody that wants it, Market Value and Market Price are identical. It is wrong to state that things have any stand-alone value, because value depends upon transactions. No transaction means zero value, whatever value estimation or selling price expectation.
When a lot of popular items in a place is almost sold out, sometimes people are willing to pay more than the asking price rather than spend time and effort to get it cheaper elsewhere. Is the paid price then Market Value or Market Price? Both.
, since real estate markets are generally considered both informationally and transactionally inefficient. Also, real estate markets are subject to prolonged periods of disequilibrium, such as in contamination situations or other market disruptions.
Appraisals are usually performed under some set of assumptions about transactional markets, and those assumptions are captured in the definition of value used for the appraisal. Commonly, the definition set forth for U.S. federally regulated lending institutions is used, although other definitions may also be used under some circumstances:
USA, Licensed or Certified Apppraisers may be required under state, federal, or local laws to develop appraisals subject to USPAP Uniform Standards of Professional Appraisal Practice
. The Uniform Standards of Professional Appraisal Practice
requires that when market value is the applicable definition, the appraisal must also contain an analysis of the highest and best use as well as an estimation of exposure time. Many states do not require mandatory licensure of appraisers.
It is important to note that USPAP does not require that all real estate appraisals be performed at market value. Indeed, there are frequent situations when appraisers are called upon to appraise other values. If a value other than market value is appropriate, USPAP only requires that the appraiser provide both the definition of value being used and the citation for that definition.
takes into account a specific use for the subject property and does not attempt to ascertain the highest and best use of the real estate. For example, the appraisal may focus on the contributory value of the real estate to a business enterprise.
Some property tax jurisdictions allow agricultural use appraisals for farmland. Also, current IRS estate tax regulations allow land under an interim agricultural use to be valued according to its current use regardless of development potential.
Fair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
or fair market value, although these terms have distinct definitions in different standards, and may differ in some circumstances.
Definition
International Valuation Standards defines market value as "the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-lengthArm's length principle
The arm's length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an "arm's-length transaction"...
transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion."
Market value is a concept distinct from market price
Market price
In economics, market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics...
, which is “the price at which one can transact”, while market value is “the true underlying value” according to theoretical standards. The concept is most commonly invoked in inefficient markets or disequilibrium
Disequilibrium
Disequilibrium is a term used to describe the lack of or opposite of an equilibrium.* in medicine:** Disequilibrium in cerebral palsy - a syndrome described by Hagberg & all** lack of equilibrioception...
situations where prevailing market prices are not reflective of true underlying market value. For market price to equal market value, the market must be informationally efficient and rational expectations
Rational expectations
Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...
must prevail.
Market value is also distinct from fair value
Fair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
in that fair value depends on the parties involved, while market value does not. For example, IVS currently notes fair value "requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction. Although market value may meet these criteria, this is not necessarily always the case. Fair value is frequently used when undertaking due diligence in corporate transactions, where particular synergies between the two parties may mean that the price that is fair between them is higher than the price that might be obtainable in the wider market. In other words "special value" may be generated. market value requires this element of "special value" to be disregarded, but it forms part of the assessment of fair value.
Relativity of market theories
Readers should realize that Market Value is not exact science, but an introduced concept from individuals and companies as a business tool. Value is subject to seller and buyer's perception and interpretation of parameters that they decide to take into consideration, while other people usually refer to their very own perceptions and interpretations of what those people think is important.Any whatever article should be explained in this context, because people pay what they want in spite of whatever advice.
Local, regional, national, international? Considering that Market Price is what people agree to pay for something at a given moment at a given place, it is important to underline the importance of the time and place range wherein sellers and buyers meet. The Local and Instant Market Value of a specific item is exactly the same as the Local Market Price. And if several people want the same thing while there is not enough for everybody that wants it, Market Value and Market Price are identical. It is wrong to state that things have any stand-alone value, because value depends upon transactions. No transaction means zero value, whatever value estimation or selling price expectation.
When a lot of popular items in a place is almost sold out, sometimes people are willing to pay more than the asking price rather than spend time and effort to get it cheaper elsewhere. Is the paid price then Market Value or Market Price? Both.
Overpricing and underpricing
These two words are used to say that a price is too high or too low in regard to the expectations of an individual or a group. It is a matter or comparison to personal expectations or/and some comparison tool as a chart, table, formula that is agreed upon and set forth as a common viewpoint by those people. Overpricing and Underpricing statements are valid if related to the used comparison origin but irrational without such a basis. More often than not, these statements are purely emotional without any valid reference.Real estate
The term is commonly used in real estate appraisalReal estate appraisal
Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...
, since real estate markets are generally considered both informationally and transactionally inefficient. Also, real estate markets are subject to prolonged periods of disequilibrium, such as in contamination situations or other market disruptions.
Appraisals are usually performed under some set of assumptions about transactional markets, and those assumptions are captured in the definition of value used for the appraisal. Commonly, the definition set forth for U.S. federally regulated lending institutions is used, although other definitions may also be used under some circumstances:
- "The most probable price (in terms of money) 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 knowledgeably, 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: the buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financingCreative financingCreative financing is a term used widely amongst real estate investors to refer to non-traditional means of real estate financing, or financing techniques not commonly used. The goal of creative financing is generally to purchase, or finance a property, with the buyer/investor using as little of...
or sales concessions granted by anyone associated with the sale."
USA, Licensed or Certified Apppraisers may be required under state, federal, or local laws to develop appraisals subject to USPAP Uniform Standards of Professional Appraisal Practice
Uniform Standards of Professional Appraisal Practice
Uniform Standards of Professional Appraisal Practice, commonly referred to by the acronym USPAP, can be considered the quality control standards applicable for real property, personal property, intangibles, and business valuation appraisal analysis and reports in the United States and its territories...
. The Uniform Standards of Professional Appraisal Practice
Uniform Standards of Professional Appraisal Practice
Uniform Standards of Professional Appraisal Practice, commonly referred to by the acronym USPAP, can be considered the quality control standards applicable for real property, personal property, intangibles, and business valuation appraisal analysis and reports in the United States and its territories...
requires that when market value is the applicable definition, the appraisal must also contain an analysis of the highest and best use as well as an estimation of exposure time. Many states do not require mandatory licensure of appraisers.
It is important to note that USPAP does not require that all real estate appraisals be performed at market value. Indeed, there are frequent situations when appraisers are called upon to appraise other values. If a value other than market value is appropriate, USPAP only requires that the appraiser provide both the definition of value being used and the citation for that definition.
Other definitions
Market value is the most commonly used definition of value in real estate appraisal in the United States because it is required for all federally regulated mortgage transactions and because the International Association of Assessing Officers (IAAO) has accepted it for use in property taxation. However, real estate appraisers use many other definitions of value in other situations.Liquidation value
Liquidation value is the most probable price that a specified interest in real property is likely to bring under all of the following conditions:- Consummation of a sale will occur within a severely limited future marketing period specified by the client.
- The actual market conditions currently prevailing are those to which the appraise property interest is subject.
- The buyer is acting prudently and knowledgeably.
- The seller is under extreme compulsion to sell.
- The buyer is typically motivated.
- The buyer is acting in what he or she considered his or her best interest.
- A limited marketing effort and time will be allowed for the completion of the sale.
- Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.
- 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.
Orderly liquidation value
This value definition differs from the previous one in that it assumes an orderly transition, and not "extreme compulsion".Federal land acquisition
For land acquisitions by or funded by U.S. federal agencies, a slightly different definition applies:- "Fair market value is defined as the amount in cash or terms reasonably equivilent to cash, for which in all probability the property would be sold by a knowledgeable owner willing but not obligated to sell to a knowledgeable purchaser who desired but is not obligated to buy. In ascertaining that figure, consideration should be given to all matters that might be brought forward and reasonably be given substantial weight in bargaining by persons of ordinary prudence, but no consideration whatever should be given to matters not affecting market value."
Going concern value
When an appraiser values the combination of a business and the real estate used for that business, the specific market value is called "going concern value". It recognizes that the combined market value may be different from the sum of the separate values: "The market value of all the tangible and intangible assets of an established operating business with an indefinite life, as if sold in aggregate."Use value
Use valueValue-in-use
Value in Use is the net present value of a cash flow or other benefits that an asset generates for a specific owner under a specific use. In the U.S., Value-in-Use is generally estimated at a use which is less than highest-and-best use, and therefore value-in-use is generally lower than market...
takes into account a specific use for the subject property and does not attempt to ascertain the highest and best use of the real estate. For example, the appraisal may focus on the contributory value of the real estate to a business enterprise.
Some property tax jurisdictions allow agricultural use appraisals for farmland. Also, current IRS estate tax regulations allow land under an interim agricultural use to be valued according to its current use regardless of development potential.