THERE MAY BE SOME LIGHT AT THE END OF THE TUNNEL
III. What are Some Alternative Value Definitions?
Some appraisers have expressed difficulties in obtaining clear guidance from their clients or 278 from secondary market participants on the correct meaning of terms and applicability of different 279 value definitions. Some clients ask for “market value” but don‟t define or understand the term. 280 Some clients want to adjust the appraisal conclusion by stipulating terms in the analysis, e.g. a 281 sale within 30 days. This usually results in a variance from the commonly-used definitions of 282 value and the appraiser must then define the term within the document to ensure the client and 283 intended users understand what type of value is conveyed in the report. 284
Most value definitions are provided to appraisers within the customary forms, e.g. URAR. Some 285 terms in common use today include market value, liquidation value, disposition value, distress 286 sale, forced sale, forced price, short sale, foreclosures, etc. Other literature may reveal additional 287 terms of importance. (Many are reprinted within a glossary at the end of this paper.) 288
Market Value: The Public Perception –
It is important to understand that most real estate 289 owners, lenders, investors and government officials believe that the term “market value” reflects 290 a gross sale price that an owner of the subject would receive if the subject were put on the market 291 as of the effective date of appraisal. 292
In most definitions, market value assumes a sale to the most probable buyer within the highest 293 and best use opinion. This means the definition of the term is based on a sale from the current 294 owner to a new owner. When an appraiser is asked for a “Market Value Opinion,” the public 295 perception would be that the appraiser will tell the client how much they can sell it for. This 296 necessitates an opinion of “the most probable buyer.” 297
Client Expectations –
It is important to discuss the type and definition of value with a client to 298 ensure the appraiser is not developing an opinion of value that is different than the client‟s 299 expectations and different than the one utilized in the appraisal. This is to avoid any 300 misunderstanding between the client and the appraiser as to the type and definition of value the 301 opinion is based on. Appraisers should match the intended use of the appraisal with the defined 302 value and carefully consider each part of the defined value. For example: 303
An appraiser is asked to use residential comparable sales to provide an opinion of value 304 on a property that has a highest and best use as commercial land. The client says, “Value 305 First Exposure Draft –
Residential Appraising in a Declining Market 13
it as a residence and ignore the commercial land value.” If the appraiser agrees to do this, 306 this appraisal has shifted from market value (commercial) to value-in-use (residential). 307
Some terms that may be significant in this issue are listed below and defined in the Glossary of 308 Terms. 309
1.
Disposition Value – This is a defined value that can be used by appraisers and clients 310 who are attempting to find a value that represents a particular need. This can be used by 311 clients in some markets to represent the value that they might sell the asset for after a 312 foreclosure. For a complete definition of these terms, and others that follow please see 313 the glossary. 314
2.
Foreclosure sale – This is the sale of a property ordered by the court and/or process of 315 law, where the seller is ordered to sell the property at auction or by other means to satisfy 316 the mortgage against that property. In many states, this is called a “sheriff‟s sale.” 317
3.
Liquidation Value – This definition is different than the standard market value definition 318 because it assumes: 319
1. Actual market conditions currently prevailing are those to which the appraised 320 property interest is subject; 321
2. The seller is under extreme compulsion to sell; and 322
3. A limited marketing effort and time will be allowed for the completion of a sale. 323
4.
Market Value – This is the standard definition used in most residential appraisals. There 324 are other value definitions used for relocation and condemnation appraisals. This 325 definition refers to a “fair sale” without “undue stimulus.” This definition is based on a 326 transaction occurring under ideal market conditions. 327
5.
Other Values – Clients may modify existing defined values to suit their current needs. If 328 an appraiser is asked to use an alternative definition, the appraiser must include that 329 defined value in the report and if another defined value is also included in the report, the 330 appraiser must be clear what definition they are using in conjunction with each value 331 opinion. 332
More than One Defined Value – Appraisers may be asked to provide more than one
333 type of value in an assignment. Appraisers should also remember that if they are conveying 334 a value opinion other than market value, the use of standard secondary market forms requires 335 caution. These forms have incorporated the definition of “Market Value” into the form. If 336 an appraiser were asked for “Liquidation Value,” it may be necessary to utilize something 337 other than a preprinted form and include the type and definition of value being utilized. In 338 most cases, preprinted secondary mortgage market forms do not offer an option of a different 339 defined value. It is possible for appraisers to add a second defined value in the report and 340 then give the client two value opinions, e.g. market value and liquidation value. However, 341 both values must be defined within the report and the report cannot be misleading and in 342 violation of USPAP.
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