AppraisalReal estate appraisal, property valuation or land valuation is the practice of developing an opinion of the value of real property, usually its Market Value. The need for appraisals arises from the heterogenous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location - which is one of the most important determinants of their value. So there cannot exist a centralised Walrasian auction setting for the trading of property assets, as there exists for trade in corporate stock. The absence of a market-based pricing mechanism determines the need for an expert appraisal/valuation of real estate/property.
There are several types and definitions of value sought by a real estate appraisal. Some of the most common are:
Market Value - The price at which an asset would trade in a competitive Walrasian auction setting. Market Value is usually interchangeable with Open Market Value or Fair Value. International Valuation Standards (IVS) define Market Value as, Market Value is the estimated amount for which a property should exchange on the date of valuation between an educated buyer and a reasonably motivated seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without undue influence.
Value-in-use - The net present value (NPV) of a cash flow that an asset generates for a specific owner under a specific use. Value-in-use is the value to one particular user, and may be above or below the market value of a property.
Investment value - is the value to one particular investor, and is usually higher than the market value of a property.
Insurable value - is the value of real property covered by an insurance policy. Generally it does not include the site value.
Liquidation value - may be analyzed as either a forced liquidation or an orderly liquidation and is a commonly sought standard of value in bankruptcy proceedings. It assumes a seller who is compelled to sell after an exposure period which is less than the market-normal timeframe.
Price versus value: - It is important to distinguish between Market Value and Price. A price obtained for a specific property under a specific transaction may or may not represent that property's market value: special considerations may have been present, such as a special relationship between the buyer and the seller, or else the transaction may have been part of a larger set of transactions in which the parties had engaged. Another possibility is that a special buyer may have been willing to pay a premium over and above the market value, if his subjective valuation of the property (its investment value for him) was higher than the Market Value. An example of this would be the owner of a neighbouring property who, by combining his own property with the subject property, could thereby obtain economies-of-scale. Such situations often arise in corporate finance, as for 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 valuations would be that the 'sum is greater than its parts', since full ownership of a company entails special privileges for which a potential purchaser would be willing to pay. Such situations arise in real estate/property markets as well. It is the task of the real estate appraiser/property valuer to judge whether a specific price obtained under a specific transaction is indicative of Market Value.
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