What is Market Value?
Valuing real estate is an art not a science. Even though it is an art, the appraiser has specific guidelines they must follow to support an opinion of value. The national guidelines, Uniform Standards of Professional Appraisal Practice (USPAP), apply to all types of properties. Each state has an additional set of laws to govern appraisers and the appraisal process. Florida laws governing appraisers is higher than USPAP and the board intends to keep it that way. The secondary mortgage market has another set of guidelines on top of the two just mentioned. How many artists are under such governmental regulations? The appraisal process is not as loose or artistic as many think.
There are various types of value definitions depending on the use of the appraisal. Remember some of my past articles have dealt with the importance of knowing why you need the appraisal. A few of the value types would include taxable value, sheriff sale value, relocation value, insurable value, and in-use value. This article will deal with market value that is typically sought by the client for use in a mortgage, estate, divorce, guide for listing, or similar uses.
Reviewing the definition of market value used by the secondary mortgage market is worth discussing to assist you in understanding market value. When a property owner does not agree with the value estimate, it is often because they have focused on one sale or listing to support the value of their property. One sale does not make a market. The listing may be a guide to the upper end but not a sale. The appraiser must look carefully at each sale to be sure it would meet the test of a true comparable and the definition of market value. The following definition is from the secondary mortgage market and is found on the preprinted portion of the form report.
Definition of 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, 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 each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open 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.
(1) Buyer and seller are typically motivated: This statement would exclude certain sales from being used as comparables. A sheriff's sale would be one example of a forced sale. The sale is forced for non-payment of taxes or some other default. Typically properties sold at a sheriff's sale will sell for less than they would if placed on the market using typical marketing techniques. In public records you will often find a sale that is a tax sale. These sales would be similar to a sheriff's sale and not a sale an appraiser would want to use.
(2) Both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest. This test would apply to many sales in Florida. Why? Many of the sales in Florida are to buyers from other states or countries. Many times those buyers pay more than market for a property due to their lack of knowledge of property prices in this area. When I'm reviewing sales and one particular sale price is out of the range of the other similar sales, a look at the deed to see where the buyer is from provides my first clue that this may have been an out of the area uniformed buyer. This is another reason USPAP and Florida Law requires the appraiser to verify the sales used in a report. Verification must be with someone involved in the transaction or with knowledge of the details of the transaction. MLS, Tax Record, Deed, and commercial databases are sources and not verification of the details of a sale.
(3)A reasonable time is allowed for exposure in the open market. In Charlotte County the typical marketing time is 180 days plus for residential properties in most areas. When a property sells in less than 30 days, the appraiser has to ask if this was a true market transaction. Relocation companies purchase houses from employees when they transfer the employee to another area. The company then sells the house and often prices it to sell within a short period. This means at a lower price than could have been received if it were on the market for 180 days plus. Other circumstances create a sale below the market in a short period. Upon the death or illness in the family occurs circumstances often require a quick sale at a discounted price. Divorce cases often result in a quick sale of a property. As the definition states, each party is acting in what he or she considers his or her own best interest. It is often vengeance that motivates the sale price for a divorce. No matter what the reason for selling quickly, if it resulted in a discount to the price, the appraiser must consider the reliability of this sale as a true market sale.
(4) Payment is made in terms of cash or in terms of financial arrangements comparable thereto. This is a big item in the market today. Many sales are occurring with special financing or concessions included to bring the price paid. The appraiser should ask the appropriate questions in the verification process to know if the terms were cash or its equivalent. If the sale included terms or financing that was not equivalent to cash, the appraiser must determine how the terms affected the sale price in order to make the appropriate adjustment to the sale.
(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 is another item we are seeing in today's market, special or creative financing. Sellers are offering to finance the sale with little money down at rates that may be less than market. In this case, the appraiser must determine if the buyer paid more for the property because of the special financing.
I discussed sales concessions a few weeks back. Sellers are offering thousands of dollars to pay closing costs, decorating allowances, a car, and even vacations to obtain a certain price. In other words, if the seller sold the property without offering these concessions they would not have obtained the sales price they did. In this case, the appraiser must adjust the sale appropriately.
To meet the definition of market value, all the above items must be considered. Many of these items are not available through public record. The property appraiser sends out a letter each year to every buyer asking him or her specific questions about the sale. The survey is to determine if the sale met the definition of market value and, therefore called an arm's length sale. If the sale is not arm's length, it will often be noted on the tax record as selling for $100.
Using sales that do not meet the definition of market value can result in a property being over or under valued. It is important to hire an experienced appraiser to assist you in the valuation of real estate. Interview the professional you hire to be sure they are qualified to handle the property type you need appraised.
Appraising real estate is an art with rules and guidelines that must be followed. The consumer must take some responsibility for hiring professionals, disclosing facts, and reviewing the work that is completed. If you are in the market for a house, Charlotte County has many to offer. Seek professionals to assist you in the purchase and enjoy your new home or investment property! Article written for Sun-Herald Newspaper, Market Place Section
