December 9, 2014 at 12:00 am
So you ask a simple question “What’s my property worth?”. Depending on whom you ask, the answer may be given quite quickly, but also may vary quite widely! Why is there such a difference?
Perhaps it wasn’t clear just “what” the property actually consists of. For instance –where is it located? How much land is included? What is the zoning, and are there any deeded easements and/or use restrictions? How big and how old is the building? Are there any tenants with leases in place? What is the condition of the property? And so on and so forth…what becomes readily apparent is that one simple question of “what’s it worth” actually involves a number of questions that require answers before the opinion given should be considered credible. Appraiser’s apply due diligence, data, and analyses in forming an opinion of value.
It is also very important to identify and define the type of “value” opinion that is being sought. One of the most common types is referred to as Market Value. As defined by the Code of Federal Regulations (which a financial institution must adhere to in a federally related transaction) – 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,
- buyer and seller are typically motivated,
- both parties are well informed or well advised, and acting in what they consider their own best interest,
- a reasonable time is allowed for exposure in the open market,
- payment is made in terms of cash in U.S. 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 financing or sales concessions granted by anyone associated with the sale. 
The definition of Market Value carries a lot of meaning and should be carefully considered. While there are varying motivations of the participants in each real estate transaction, a Market Value opinion is not accurately measured by ignorance or duress on the part of the buyer or seller.
Perhaps one of the biggest differences between participants may be attributed to the definition of Market Value itself being “…the most probable price…” which may not in fact be the “highest” price. Put another way, Market Value can be thought of as what 8 or 9 out of 10 people would be justified in paying versus what 1 or 2 buyers might be willing to pay because of some atypical need at hand. There may be one particular buyer that would be willing to pay the most for a given property (e.g., an abutter, a tenant in place, a developer, etc…) but that does not mean that the price they would pay is the “normal consideration” based upon typical motivations, well informed participants, conventional financing, and with no undue stimulus.
There are many types and definitions of “value”. Some of the more common are: Market Value, Assessed Value, Liquidation Value, Value-in-Use, Insurable Value, Investment Value, Going-Concern Value, Prospective Value upon Completion and/or Stabilization, and, Retrospective Value. There are many more that apply to specific situations and valuation assignments. So what type of value opinion are you seeking?
In closing, one of my favorite quotes is from John F. Kennedy, who said “Too often we… enjoy the comfort of opinion without the discomfort of thought.” While I don’t think he was referring to real estate per se, I find that differences in value opinions can sometimes result from a lack of due diligence and/or a misunderstanding of the valuation basis. Simply put, if the opinion of value is to have any credibility, identification of “what” the property to be valued consists of, and the specific type of “value” sought, needs to be clarified before a meaningful opinion can be derived.
Mark L. Plourde, MAI is the Managing Partner of Maine Valuation Company, and a MEREDA member since 1997. Maine Valuation Company provides unbiased professional opinions of value on commercial real estate along with appraisal review services throughout Maine. www.mainevaluation.com
 Code of Federal Regulations, Title 12 Volume 1 [12CFR § 34.42 (g)]
Categories: Maine Real Estate Insider