The type of value and its definition constitute important assignment elements that must be determined

as part of problem identification, i.e., the first step of the valuation process. The type of value—and the
specifications set out for it in its definition— to a large degree dictate the nature of the data collected
and the analyses performed in the remaining steps of the valuation process. In any appraisal assignment
in which an opinion of value is a component of the scope of work, the type of value and its specific
definition are established by the appraiser based on communication with the client at the time of
engagement.

The definition of value typically has precise wording that is cited from an authoritative source. The
source may vary depending on the client and intended user. For example, the lending industry has a
specific definition of market value established by federal regulation. A litigation valuation assignment
may have a different definition of market value established by state law. It is imperative that appraisers
describe the type of value and specify certain conditions that must be met for assignment results to be
credible and meaningful. In an appraisal report, the definition of value provides the client with a formal
explanation of the type of value being developed and thus the objective of the appraisal. In fact,
professional valuation standards require that the definition of value being used in an assignment be
included in an appraisal report.

In appraisal practice, the use of the term value alone is often incomplete and is a potentially misleading
description of an opinion of the relative worth of an asset. In an appraisal, the term value is always
accompanied by a modifier, e.g., market value, investment value, insurable value. Appraisers typically
refer to a particular type of value rather than use the word value on its own. The different value types
clarify whose opinion is relevant, under what specific circumstances, or for what purpose. For example,
market value is the opinion of a “market” collectively under specific conditions set forth in the relevant
definition relating to the relationship, knowledge, and motivation of the parties, the terms of sale, and
the conditions of sale.

Market Value

The concept of market value is of paramount importance to real estate communities. Vast sums of debt
and equity capital are committed each year to real estate investments and mortgage loans that are
based on opinions of market value. Real estate taxation, litigation, and legislation also reflect an
ongoing, active concern with market value issues. In virtually every aspect of the real estate industry and
its regulation at local, state, and federal levels, market value considerations are essential to economic
stability.

A number of different definitions of market value can be found in a variety of sources, including
appraisal texts, real estate dictionaries, professional valuation standards, federal and state regulations,
laws, and court decisions. Despite differing opinions on individual aspects of the market value definition,
it is generally agreed that market value results from the collective value judgments of market
participants. An opinion of market value is based on objective observation of the collective actions of
the market. Because the standard measure of these activities is usually cash, the increases or
diminutions in the sale price caused by financing and other terms of sale are measured against an all-
cash value.

The definition that follows represents the concept of value in exchange, and it incorporates the concepts
that are most widely accepted, such as willing, able, and knowledgeable buyers and sellers who act
Some appraisers cite this definition verbatim in their appraisal reports and state separately that the
value is stated in cash, in terms equivalent to cash, or in other terms. Other appraisers reword relevant
phrases in the value definition—e.g., they might substitute “in cash” with “in terms arithmetically
equivalent to cash” or “in terms precisely revealed below” as appropriate.

The definition of market value developed by the International Valuation Standards Council and used in
the International Valuation Standards (IVS) explicitly references an “exchange” of property. In those
standards, market value is defined asprudently as of a specific date, with three possible bases: (1) all
cash, (2) terms equivalent to cash, or (3) other precisely revealed terms. The definition also requires
variation from the all-cash market value to be quantified in terms of cash or cash equivalency The
general valuation framework guiding the International Valuation Standards reiter that the willingness to
trade and the views attributed to market participants are “typical of those of buyers and sellers, or
prospective buyers and sellers, active in a market on the valuation date, not to those of any particular
individual or entity.” The market value basis of valuation described in the International Valuation
Standards is consistent with other discussions of market value in professional valuation standards.

The Uniform Standards of Professional Appraisal Practice (USPAP) defines market value conceptually as
that the willingness to trade and the views attributed to market participants are “typical of those of
buyers and sellers, or prospective buyers and sellers, active in a market on the valuation date, not to
those of any particular individual or entity.” The market value basis of valuation described in the
International Valuation Standards is consistent with other discussions of market value in professional
valuation standards.

The Uniform Standards of Professional Appraisal Practice (USPAP) defines market value conceptually as
It is important to note that USPAP does not provide a citable definition of market value. Instead, USPAP
states that “appraisers are cautioned to identify the exact definition of market value, and its authority,
applicable in each appraisal completed for the purpose of market value.” Therefore, an appraiser may
not cite USPAP as the source for a definition of market value.

Citable definitions of market value can be found in state and federal regulations, laws, or publications.
For example, the following definition4 of market value is used by agencies that regulate federally
insured financial institutions in the United States:

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:

 buyer and seller are typically motivated;

 both parties are well informed or well advised, and acting in what they consider their own best
interests;
 a reasonable time is allowed for exposure in the open market;
 payment is made in terms of cash in US 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 concessions5 granted by anyone associated with the sale.
The definition of market value used by Fannie Mae and Freddie Mac includes additional discussion of
financing and sales concessions:

Adjustments to the comparables must be made for special or creative financing or sales concessions. No
adjustments are necessary for those costs that are normally paid by sellers as a result of tradition or law
in a market area; these costs are readily identifiable because the seller pays these costs in virtually all
sales transactions. Special or creative financing adjustments can be made to the comparable property by
comparisons to financing terms offered by a third-party institutional lender that is not already involved
in the property or transaction. Any adjustment should not be calculated on a mechanical dollar-for-
dollar cost of the financing or concession, but the dollar amount of any adjustment should approximate
the market’s reaction to the financing or concessions based on the appraiser’s judgment.

The Uniform Appraisal Standards for Federal Land Acquisitions (which at one time was referred to
informally as “the Yellow Book”) includes the following definition of market value, which must be used
in appraisals performed subject to these standards:

Market value is the amount in cash, or on terms reasonably equivalent to cash, for which in all
probability the property would have sold on the effective date of value, after a reasonable exposure
time on the open competitive market, from a willing and reasonably knowledgeable seller to a willing
and reasonably knowledgeable buyer, with neither acting under any compulsion to buy or sell, giving
due consideration to all available economic uses of the property.

Government and regulatory agencies may redefine or reinterpret market value for specific types of
assignments, so individuals performing appraisal services for these agencies or for institutions under
their control must be sure to use the applicable definition.

Client wishes or instructions do not change the basic requirement that appraisers must identify the
intended use of the assignment results and use an appropriate definition of market value for the
intended use. Appraisers must understand why the particular definition of market value should be used
in an assignment, apply that definition according to established standards and recognized practice, and
communicate the requirements of the assignment clearly to the clients they serve.

Other Types of Value

Appraisals of the market value of real property are the most common types of assignments, but
appraisers are also called upon by clients to develop opinions of a variety of other types of value such as
the following:

 Fair value
 Use value
 Investment value
 Assessed value
 Insurable value
 Liquidation value
 Disposition value

Fair Value
Historically, the accounting profession in the United States has used the depreciated purchase price to
report the value of corporate assets for tax purposes and in financial statements. In the wake of the
auditing scandals that gave rise to the Sarbanes Oxley Act of 2002, the International Accounting
Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) changed the generally
accepted accounting principles (GAAP) to recognize that fair value is a more accurate measurement. In
2007, FASB defined fair value as follows :

This definition is more akin to an opinion of market value as appraisers have long defined the term. Like
market value, fair value measurement assumes that the asset or liability is exchanged in an orderly
transaction between market participants to sell the asset or transfer the liability at the measurement
date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to
the measurement date to allow for marketing activities that are usual and customary for transactions
involving such assets or liabilities. It is not a forced transaction such as a forced liquidation or distress
sale. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the
measurement date, considered from the perspective of a market participant who holds the asset or
owes the liability. Therefore, the objective of a fair value measurement is to determine the price that
would be received to sell the asset or paid to transfer the liability at the measurement date (i.e., an exit
price).

Market participants are buyers and sellers in the principal (or most advantageous) market for the asset
or liability who are

1. Independent of the reporting entity (i.e., they are not related parties)

2. Knowledgeable, having a reasonable understanding about the asset or liability and the transaction
based on all available information, including information that might be obtained through due diligence
efforts that are usual and customary

3. Able to transact for the asset or liability

4. Willing to transact for the asset or liability (i.e., they are motivated but not forced or otherwise
compelled to do so)

The fair value of the asset or liability should be determined based on the assumptions that market
participants would use in pricing the asset or liability.

A fair value measurement assumes the highest and best use of the asset by market participants,
considering the use of the asset that is physically possible, legally permissible, and financially feasible at
the measurement date. The highest and best use of the asset establishes the valuation premise used to
measure the fair value of the asset, specifically:

1. In use. The highest and best use of the asset in use would provide maximum value to market
participants principally through its use in combination with other assets as a group.

2. In exchange. The highest and best use of the asset is in exchange if the asset would provide maximum
value to market participants principally on a standalone basis.

The real estate appraiser may need to report both values so that the user of the report can make an
informed decision
Use Value

Market value opinions are based on the highest and best use of a property. In contrast, use value is the
value that a specific property has for a specific use, which may or may not be the highest and best use of
the property.

Use value has very limited application. However, court decisions and specific statutes may create the
need for use value appraisals. For instance, many states require agricultural use appraisals of farmland
for property tax purposes (i.e., value based on soil productivity) rather than opinions of value based on
highest and best use. The current IRS regulation on estate taxes allows land under an interim agricultural
use to be valued according to this alternative use even though the land has development potential.9
Also, a seminal ruling in California, which has been cited in other jurisdictions, involved the appraisal of
properties subject to title claims. In Overholtzer v. Northern Counties Title Insurance Company, the
value diminution caused by a defect in title was measured by the use of the property when the defect
was discovered, not the highest and best use of the property.

Use Value, Value in Use, and Investment Value in the IVS

The term value in use has often been used by real estate appraisers synonymously with use value, but
value in use is a different concept. In the IVS, value in use is the value the real estate (or any asset)
contributes to the enterprise of which it is a part—i.e., what was called contributory value earlier in this
chapter. It is the amount the property would add to the sale price of the enterprise. For example,
assume a specialty manufacturer has a new building constructed at a cost of $5 million including an
appropriate developer fee. Assume also that the building perfectly suits the manufacturer’s needs and
that profits from the manufacturing operation are in excess of the amount necessary to justify the cost
of the building. It would be reasonable to conclude that, if the enterprise sold, the building would
contribute $5 million to its price. Therefore, its value in use would be $5 million. On the other hand, an
appraiser might conclude that if the building was sold separate and apart from the business or any other
asset, it would sell for only $3.5 million because the specialized building features do not add utility for
other tenants. In that case, the value in exchange is $3.5 million, but the value in use is $5 million.

The International Financial Reporting Standards defines value in use as “the discounted present value of
estimated future cash flows expected to arise from the continuing use of an asset and from its disposal
at the end of its useful life.” This definition is paraphrased in the International Valuation Standards
application related to valuation for financial reporting. In the case of real estate, the cash flows from use
of the asset are the net amount of rent that is saved by owning the property. In the example in the
previous paragraph, the specialty manufacturer has two options: (1) spend $5 million to have a building
constructed or (2) bid the project out to a developer who would invest the $5 million and lease the
property to the manufacturer at an appropriate rent. If the manufacturer owns the building, value in use
can be calcu