Market Value Defined | Valuation Definitions | Bibliographical References | Authoritative Sources

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market value

As defined and explained in Real Estate Defined

The amount that a property might be expected to realize, usually expressed in monetary terms, when it is offered for sale in an open market, for a reasonable period of time, by a willing seller, in order to enable the property to be brought to the attention of all or most potential and willing buyers and when the transaction is not affected by any special circumstances that might affect the buyer, the seller or the property. The best price that a property might reasonably be expected to realize if sold in the normal course of business, after allowing a reasonable time for exposure to potential buyers, and assuming that the buyer and seller are acting in their own best interests, have entered into the transaction without any element of compulsion or duress, and the buyer does not have any special relationship or obligation to the seller. The determination of market value is normally based on a set of assumtions, such as the type and condition of the property, the interest held, the nature and conditions prevalent in the market at the date of the valuation and the purpose of the valuation.

   "The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. … Market Value is understood as the value of an asset estimated without regard to costs of sale or purchase, and without offset of any associated taxes', The Royal Institution of Chartered Surveyors, Appraisal & Valuation Standards, PS 3.2., 3.3.2 (5th ed. London: 2003, as amended). A detailed Commentary on the definition is set out in the Appraisal & Valuation Standards. This definition has been accepted by the International Valuation Standards Committee (International Valuation Standards (8th ed. London: IVSC, 2007)). When applying this definition the valuer may also be required to add a statement of what is being valued and any assumptions that are inherent in the valuation.  A similar definition was adopted by the Basel Committee on Banking Supervision in Criteria in defining commercial real estate lending: Supplement to the New Basle Capital Accord (Jan 2001).

   The Australian Property Institute and the Property Council of New Zealand have adopted the same definition as the RICS, but excluding the reference to costs and taxes (Australian Property Institute, Australia and New Zealand Valuation and Property Standards, 2008, § 5.2)—noting that in some States the term Fair Market Value is used synonymously with Market Value, although stating that the IVSC position is that the term Market Value “never requires further qualification and that all States should move towards compliance”. Also pointing out that Fair Market Value should not be confused with the accounting term Fair Value (supra, § 5.5).

   For bank loans secured against property the European Commission has adopted the following definition: "Market value shall mean the price at which land and buildings could be sold under private contract between a willing buyer and an arm’s-length buyer on the date of valuation, it being assumed that the property is publicly exposed to the market, that market conditions permit orderly disposal and that a normal period, having regard to the nature of the property, is available for the negotiation of the sale", European Council Directive 89/647/EEC. However, many banks now follow the RICS/IVSC definition above, or the definition of 'mortgage lending value' in Directive 98/32/EEC (see mortgage value).

   In the US, the most commonly used definition of 'market value' is "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 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: 1. buyer and seller are typically motivated; 2. both parties are well informed or well advised, and acting in what they consider their best interests; 3. a reasonable time is allowed for exposure to the market; 4. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and 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". This definition is taken from regulations published by federal regulatory agencies pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 and is applicable to a federally-related transaction (FRT) (which is "any real estate-related financial transaction which–(A) a federal institutions regulatory agency or the Resolution Trust Corporation engages in, or contracts for, or regulates; and (B) requires the services of an appraiser"). This definition is also referred to in regulations jointly published by the OCC, OTS, FRS, and FDIC on June 7, 1994, and in the Interagency Appraisal and Evaluation Guidelines, dated October 27, 1994.

   In the Appraisal Foundation's Uniform Standards of Professional Appraisal Practice (USPAP) (Washington, DC: 2008-2009 Edition), 'market value' is referred to as "a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal". Also, the Comment on this definition states that "forming an opinion of market value is for the purpose of many real property appraisal assignments, particularly when the client’s intended use includes more than one intended user. The conditions included in market value definitions establish market perspectives for development of the opinion. These conditions may vary from definition to definition but generally fall into three categories: 1. the relationship, knowledge and motivation of the parties (i.e., seller and buyer); 2. the terms of sale (e.g., cash, cash equivalent or other terms); 3. the conditions of sale (e.g., exposure in a competitive market for a reasonable time prior to sale)". In the Advisory Opinion 22 (AO-22) to USPAP 'General Comment on Market Value Definitions', the FIRREA definition is referred to by way of example, and this General Comment also emphasizes that there are many definitions of market value (or similar terms) that come from different sources, and such definitions may contain different conditions, "therefore, identification of the source for the definition of value to be applied in an assignment is essential". USPAP also points out that persons performing appraisal services that may be subject to litigation are cautioned to seek the exact legal definition of market value in the jurisdiction in which the services are being performed (note: the Advisory Opinions to USPAP are "forms of Other Communications" provided by the Advisory Standards Board, as such they are for guidance only and do not form a part of the Standards) (See: for further information on USPAP and how to obtain a copy).

   'Market value' is the amount that a property might be expected to bring, as distinguished from market price, which is the amount for which a property is sold at a given date; although the terms are used sometimes interchangeably. Market value is established by reference to the transactions in the normal and regular course of business; it is based on evidence from private treaty sales of similar properties. It is an estimate of worth based on certain implicit assumptions, namely that: (i) neither the buyer nor the seller is under any undue influence or duress to consummate the bargain and both are motivated to conclude a transaction; (ii) a reasonable time is allowed to negotiate a bargain, given the type of property and the state of the market; (iii) the bargain is concluded subsequent to an arm's-length negotiation; (iv) both parties are well informed or well advised as to the terms of the transaction and are acting in their own best interest; (v) the sale is concluded as a simple cash (or equivalent) transaction; (vi) no account is to be taken of any special circumstances, such as special or creative financing, any concession or 'kick back', or an additional bid from any special purchaser.

   In English statute law, market value is defined as "the price which [an asset] might reasonably be expected to fetch on a sale in the open market"; no reduction being made for the fact that the whole of the asset (to which a gain under the Act may be charged) is being placed on the market at the same time (Taxation of Chargeable Gains Act 1992, ss. 272–274; Finance Act 2003, ss. 118).

   In Australia, in the context compulsory acquisition compensation, it has been said that "the test of the value of land is determined not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e. whether there was on that day a willing buyer, but by inquiring 'What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' … [It is necessary to ascertain what] a purchaser would have to offer for the land to induce such a willing seller to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together. … Whether the land becomes more valuable or less valuable afterwards is immaterial. Its value is fixed by Statute on that day", Spencer v The Commonwealth of Australia (1907) 5 CLR 418, 432, 440-1 (The Commonwealth v Arklay (1952) 87 CLR 169, 170; Minister for Public Works v Thistlethwayte (1954) AC 490, 491 (PC)).  See also actual cash value, compulsory purchase compensation(Eng), fair market value, highest and best use, open market value(BrE), value.

Terms in bold are defined elsewhere in the Encyclopedia.
Further explanation of the style of reference material is provided in the User Guide (available to subscribers)

bibliographic references:
Appraisal Institute. Readings in Market Value (Chicago: 1981), pp. 68–74.
4 Nichols on Eminent Domain (3rd rev. ed. San Francisco: Loose-leaf), § 12.02 et seq.

Australian Property Institute. Valuation Principals and Practice, (2nd ed. Deakin, ACT: 2007).
A.A. Hyam. The Law Affecting Valuation of Land in Australia (4th ed. Pyrmont, NSW: 2009), pp. 40–2.
M.S. Jacobs. Law of Compulsory Land Acquisition (Pyrmont, NSW: 2010), Ch. 19 'Comparative or Market Data Approach (the Comparable Sales Method)'.

J. Armatys et al. Principles of Valuation (London: 2009), Ch. 2 'Concept of Value and Glossary'.
A. Cherry. A valuer's guide to the Red Book (London: 2006), Ch. 4 'Valuation bases'.
International Valuation Standards Committee. International Valuation Standards (8th ed. London: 2007), pp. 27, 76–84, 87 et seq.

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