A real estate a raisal is a service performed, by an a raiser, that develo an opinion of value base
A real estate a raisal is a service performed, by an a raiser, that develo an opinion of value based upon the highest and best use of real property. The highest and best use is that use which produces the highest po ible value for the property. This use must be profitable and probable. Also of importance is the definition of the type of value being developed and this must be included in the a raisal, ie fair market value, condemnation value, quick sale value, etc. For improved residential property, this value is most often reported on a standardized form, the Uniform Residential A raisal Report.
In the UK, real estate a raisal is known as property valuation and a real estate a raiser is a property valuation surveyor. Property valuation in the UK is regulated by the Royal I titution of Chartered Surveyors (RICS), a profe ional body encompa ing all of the building and property-related profe io . The RICS profe ional guidelines for valuers are published in the Red Book.
The reader should be aware that differences in nomenclature exist between the different countries. Although the overall concepts are very similar, the reader should be careful to ascertain that the proper nomenclature is being used for their particular area.
Types of value
There are several types and definitio of value sought by a real estate a raisal. Some of the most common are listed:
Market Value The price at which an a et would trade in a competitive Walrasian auction setting. Market value is usually interchangeable with fair market value or fair value. The legal definition of market value is usually given by some variant of the following: "The most probable price at which a property would trade in an arms-length tra action in a competitive and open market, in which the buyer and seller each act prudently and knowledgeably and in which the price is not affected by any ecial relatio hip between them".
Value-in-use The net present value ( V) of a cash flow that an a et generates for a ecific owner under a ecific use. Value-in-use is the value to one particular user, which may be above or below the fair market value of a property.
Investment value - is the value to one particular investor, which may be above or below the fair market value of a property.
I urable value - is the value of real property covered by an i urance policy. Generally it does not include the site value.
It is important to distinguish between market value and price. A price obtained for a ecific property under a ecific tra action may or may not represent that property's market value: ecial co ideratio may have been present, such as a family relatio hip between the buyer and seller, or else the tra action may have been part of a larger set of tra actio in which the parties had engaged. Another po ibility is that a ecific buyer would be willing to pay a price higher than the market value. Such situatio often arise in corporate finance, as per example when a merger or acquisition is concluded at a price which is higher than the value represented by the price of the underlying stock. The usual rationale for these valuatio is that the 'sum is greater than its parts', since full ownership of a company entails ecial privileges for the buyer for which he is willing to pay. Such situatio arise in real estate/property markets as well (see value-in-use). It is the task of the real estate a raiser/property valuer to judge whether a certain price obtained under a certain tra action is indicative of market value.
Market value definitio in the US
In the US, "Fair Market Value" and "Fair Value" are commonly used as accounting terms. The equivalent a raisal term is "Market Value." (U AP Advisory Opinion 8.) U AP defines Market Value as "a type of value, stated as an opinion, that presumes the tra fer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under ecific conditio set forth in the definition of the term identified by the a raiser as a licable in an a raisal".
Forming an opinion of market value is the purpose of many real property a raisal a ignments, particularly when the clients intended use includes more than one intended user. The conditio included in market value definitio establish market per ectives for development of the opinion. These conditio may vary from definition to definition but generally fall into three categories:
1) The relatio hip, knowledge, and motivation of the parties (i.e., seller and buyer);
2) The terms of sale (e.g., cash, cash equivalent, or other terms); and
3) The conditio of sale (e.g., exposure in a competitive market for a reasonable time prior to sale).
(Definitio : U AP 2005.)
In the US, a typical definition of market value can be found on the FNMA residential a raisal forms, as the FNMA 1025, which states the following:
DEFINITION OF MARKET VALUE: The most probable price which a property should bring in a competitive and open market under all conditio requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and a uming the price is not affected by undue stimulus. Implicit in this definition is the co ummation of a sale as of a ecified date and the pa ing of title from seller to buyer under conditio 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 co iders 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 co ideration for the property sold unaffected by ecial or creative financing or sales conce io * granted by anyone a ociated with the sale.
'*'Adjustments to the comparables must be made for ecial or creative financing or sales conce io . No adjustments are nece ary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales tra actio . ecial or creative financing adjustments can be made to the comparable property by compariso to financing terms offered by a third party i titutional lender that is not already involved in the property or tra action. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or conce ion but the dollar amount of any adjustment should a roximate the markets reaction to the financing or conce io based on the a raisers judgment.(FNMA form 1025, March 2005.)
In the UK, real estate a raisal is known as property valuation and a real estate a raiser is a property valuation surveyor. Property valuation in the UK is regulated by the Royal I titution of Chartered Surveyors (RICS), a profe ional body encompa ing all of the building and property-related profe io . The RICS profe ional guidelines for valuers are published in the Red Book.
The reader should be aware that differences in nomenclature exist between the different countries. Although the overall concepts are very similar, the reader should be careful to ascertain that the proper nomenclature is being used for their particular area.
Types of value
There are several types and definitio of value sought by a real estate a raisal. Some of the most common are listed:
Market Value The price at which an a et would trade in a competitive Walrasian auction setting. Market value is usually interchangeable with fair market value or fair value. The legal definition of market value is usually given by some variant of the following: "The most probable price at which a property would trade in an arms-length tra action in a competitive and open market, in which the buyer and seller each act prudently and knowledgeably and in which the price is not affected by any ecial relatio hip between them".
Value-in-use The net present value ( V) of a cash flow that an a et generates for a ecific owner under a ecific use. Value-in-use is the value to one particular user, which may be above or below the fair market value of a property.
Investment value - is the value to one particular investor, which may be above or below the fair market value of a property.
I urable value - is the value of real property covered by an i urance policy. Generally it does not include the site value.
It is important to distinguish between market value and price. A price obtained for a ecific property under a ecific tra action may or may not represent that property's market value: ecial co ideratio may have been present, such as a family relatio hip between the buyer and seller, or else the tra action may have been part of a larger set of tra actio in which the parties had engaged. Another po ibility is that a ecific buyer would be willing to pay a price higher than the market value. Such situatio often arise in corporate finance, as per example when a merger or acquisition is concluded at a price which is higher than the value represented by the price of the underlying stock. The usual rationale for these valuatio is that the 'sum is greater than its parts', since full ownership of a company entails ecial privileges for the buyer for which he is willing to pay. Such situatio arise in real estate/property markets as well (see value-in-use). It is the task of the real estate a raiser/property valuer to judge whether a certain price obtained under a certain tra action is indicative of market value.
Market value definitio in the US
In the US, "Fair Market Value" and "Fair Value" are commonly used as accounting terms. The equivalent a raisal term is "Market Value." (U AP Advisory Opinion 8.) U AP defines Market Value as "a type of value, stated as an opinion, that presumes the tra fer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under ecific conditio set forth in the definition of the term identified by the a raiser as a licable in an a raisal".
Forming an opinion of market value is the purpose of many real property a raisal a ignments, particularly when the clients intended use includes more than one intended user. The conditio included in market value definitio establish market per ectives for development of the opinion. These conditio may vary from definition to definition but generally fall into three categories:
1) The relatio hip, knowledge, and motivation of the parties (i.e., seller and buyer);
2) The terms of sale (e.g., cash, cash equivalent, or other terms); and
3) The conditio of sale (e.g., exposure in a competitive market for a reasonable time prior to sale).
(Definitio : U AP 2005.)
In the US, a typical definition of market value can be found on the FNMA residential a raisal forms, as the FNMA 1025, which states the following:
DEFINITION OF MARKET VALUE: The most probable price which a property should bring in a competitive and open market under all conditio requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and a uming the price is not affected by undue stimulus. Implicit in this definition is the co ummation of a sale as of a ecified date and the pa ing of title from seller to buyer under conditio 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 co iders 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 co ideration for the property sold unaffected by ecial or creative financing or sales conce io * granted by anyone a ociated with the sale.
'*'Adjustments to the comparables must be made for ecial or creative financing or sales conce io . No adjustments are nece ary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales tra actio . ecial or creative financing adjustments can be made to the comparable property by compariso to financing terms offered by a third party i titutional lender that is not already involved in the property or tra action. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or conce ion but the dollar amount of any adjustment should a roximate the markets reaction to the financing or conce io based on the a raisers judgment.(FNMA form 1025, March 2005.)
