MARKET VALUE BASIS OF VALUATION
This standard should be read in the
context of the background materials and
implementation guidance contained in
General Valuation Concepts and
Principles.
Introduction
1. The objective of this Standard is to provide a
common definition of Market Value. This
Standard. This Standard also explains the
general criteria relating to this definition and
to its application in the valuation of property
when the purpose and intended use of the
valuation calls for estimation of Market
Value.
2. Market Value is a representation of value in
exchange, or the amount a property would
bring if offered for sale in the (open) market
at the date of valuation under circumstances
that meet the requirements of the Market
Value definition.
3. Market Value resides in estimate and
determination of what is fair, economic, just
and equitable value under normal conditions
and all elements of value that are inherent in
property should be considered .
4. Market Value is estimated through application
of valuation methods and procedures that
reflect the nature of property and the
circumstances under which the given property
would most likely trade in the (open) market.
The most common methods used to estimate
Market Value include the cost approach,
market/data sales comparison approach, and
the income capitalization approach, including
discounted cash flow analysis.
5. All Market Value measurement methods,
techniques, and procedures will, if applicable
and if appropriately and correctly applied,
lead to a common expression of Market
Value when based on Market-derived criteria.
Construction costs and depreciation should
be determined by reference to an analysis of
market-based estimates of costs and
accumulated depreciation. Sales comparisons
or other market comparisons should evolve
from market observations. The income -
capitalization approach, including discounted
cash flow analysis, should be based on
market-determined cash flows and market-
derived rates of return. Although data
availability and circumstances relating to the
market or the property itself will determine
which valuation methods are most relevant
and appropriate, the outcome of using any of
the foregoing procedures must be Market
Value if each method s based on market-
derived data.
SCOPE
This Standard refers to the estimation of
Market Value of real estate and other types
of property. It requires that the property
under consideration be viewed as if for sale
in the (open) market, in contrast to being
evaluated as part of a going concern or for
some other purpose.
The standards covers both government
Assessors/Appraisers and private
practitioners and is applicable for all
purposes using Market Value as basis,
including taxation and other government
purposes.
DEFINITION
Market Value is defined for the purpose of these
Standards as follows:
Market Value is 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 length transaction (a
transaction between independent , unrelated
parties involving no irregularity) after proper
marketing wherein the parties had each acted
knowledgeable, prudently, and without
compulsion.
This definition assumes that titles to the
property are good and marketable, free from
liens and encumbrances and that fee simple
ownership is transferable. 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 they
consider their own best interest.
3. A reasonable time is allowed for exposure in
the open market.
4. Payment is made in cash or its equivalent.
5. Financing, if any, is on terms generally
available in the community at the specified
date and typical for the property type in its
locate.
6. The price represents a normal consideration
for the property sold unaffected by special
financing amounts and/or terms, services,
fees, costs, or credits incurred in the
transaction.
STATEMENT OF STANDARD
To perform valuations that comply with these
Standards and General Valuation Concepts
and Principles (GVCP), it is mandatory that
Appraisers/Assessors adhere to the Code of
Conduct pertaining to Ethics, Competence,
Disclosure, and Reporting. In performing and
reporting a Market Value estimate, the
appraiser/Assessor shall:
1. Completely and understandably set forth the
valuation in a manner that will not be
misleading;
2. Ensure that the estimate of Market Value is
based on Market-derived data;
3. Ensure that the estimate of Market Value is
undertaken using appropriate methods (Cost
Approach, Market Data/Sales Comparison
Approach and Income Capitalization
Approach) and techniques; and
4. Provide sufficient information to permit
those who read and rely on the report to
fully understand its data, reasoning,
analyses, and conclusions. In this connection,
the Appraiser/Assessor should:
a. Define the value being estimated and state
the purpose and intended use of the
appraisal, and the date of the report;
b. Clearly identify and describe the property
and property rights or interests being
appraised;
c. Describe the scope/ extent of the work
undertaken and the extent to which the
property was inspected;
d. State any assumptions and limiting
conditions upon which the valuation is
based;
e. Fully and completely explain the methods
applied and the reasons for their applications
and conclusions; and
f. Include a signed Compliance Statement
(Certification of Value) attesting to the
Assessor/Appraiser’s objectivity, professional
contributions, non-bias, as well as standards’
applicability, and other disclosures.
EXPLANATION
Market Value is an estimate of the price that is
expected to be realized in the sale of the
property at the valuation date under
conditions of the Market Value definition.
Market Value is a representation of the price
to which a buyer and seller would agree at
that time under the Market Value Definition,
each previously having had time for
investigation of other market opportunities
and alternatives, and notwithstanding the fact
that it may take some time to prepare formal contracts
and related closing documentation. The concept of
Market Value presumes a price negotiated in an open
and competitive market. The words open and
competitive have no absolute meaning. The market
for one property could be an international market or
a local market. The market could consist of numerous
buyers and sellers, or could be one characterized by a
limited number of participants. The market in which
the property is exposed for sale is not a definitionally
restrictive or constricted market. Stated conversely,
the omission of the word open does not indicate that
a transaction would
be private or closed. Market valuations are
generally based on information regarding
comparable properties. The valuation process
requires an Assessor/Appraiser to conduct
adequate and relevant research, to perform
competent analyses, and to draw informed
and supportable judgments. In this process,
Assessors/Appraisers do not accept data
without question but should consider all
pertinent market evidences, trends,
comparable questions and other information .
Where market data are limited, or essentially
non-existent (as for example with certain
specialized properties), the Assessor/appraiser
must make proper disclosure of the situation
and must state whether the estimate is in any
way limited by the inadequacy of data. All
Valuations require exercise of an
Assessor/Appraiser’s judgment, but reports
should disclose whether the
Assessor/Appraiser bases the Market Value
estimate on market evidence or whether the
estimate is more heavily based upon the lack
of comparable market data. Because changing
conditions are characteristics of markets,
Assessors/Appraisers must consider whether
available data reflect and meet the criteria
for Market Value:
a.) Changes in market condition occur constantly
and this may continue over a period of years.
Economic change may give rise to erratic market
data. If some sales are out of line with the
market, the Assessor/Appraiser will generally
give them less weight. It may still be possible for
the Assessor/Appraiser to judge from available
data where the realistic level of the market is.
Individual transaction prices may not be
evidence of Market Value, but analysis of such
market data should be taken into consideration
in the valuation process.
b. In poor or falling markets there may or may not
be a large number of “willing sellers”. Some, but
not necessarily all, transactions may involve
elements of financial (or other) duress or
conditions that reduce or eliminate the practical
willingness of certain owners to sell.
Assessors/Appraisers must take into account all
pertinent factors in such market conditions and
attach such weight to individual transactions that
they believe proper to reflect the market.
Liquidators and receivers are normally under a
duty to obtain the best price in asset disposals.
Sales,
however, may take place without proper
marketing or a reasonable marketing period.
The Assessor/Appraiser must judge such
transactions to determine the degree to
which they meet the requirements of the
Market Value definition and the weight that
such data should be given.
c. During periods of market transition
characterized by rapidly rising or falling
prices, there is a risk of over-or-under-
valuation if undue weight is given to historic
information or if warranted assumptions are
made regarding future markets. In these
circumstances, Assessors/Appraisers must
carefully analyze and reflect actions and
attitudes of the market and take care that
they fully disclose the results of their
investigations and findings in their reports.
The concept of Market Value also presumes that
in a market value transaction a property will
be freely and adequately exposed on the
(open) market for a reasonable period of time
and with reasonable publicity. This exposure is
presumed to occur prior to the effective date
of value. Markets for fixed assets typically
differ from those available for stocks/shares,
bonds, and other current assets. Fixed Assets
tend to be unique. They are usually sold to
less frequently and in markets which are less
format and more inefficient than, for example,
markets for listed securities. Further, fixed
assets are less liquid. For these reasons, and
because fixed assets do not commonly trade
on a public exchange, the application of the
concept of Market Value requires the use of
assumptions such as adequate market
exposure over a reasonable time period to
allow for proper marketing, and completion
of negotiations.
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