Definitions adopted by Royal Institution of Chartered Surveyors (RICS):
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
A particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market.
The estimation of market value must involve an analysis of………The MARKET! As such, the analysis involves consideration of the following factors:
- Purchase price of the subject property;
- Comparables (i.e. sales evidence of other properties; and
- Market trend (are property prices over time rising, stable or declining?)
What is market value (MV)? RICS-adopted definition is provided below but simply, it means that more than one buyer exists for the property if it is offered at that estimated value. How do the above-mentioned factors influence this value? Sometimes market players (i.e. a purchaser and a vendor) will agree a price for a property. This price is usually manifested in an agreement for sale. We ask for a copy of this agreement since the best indication of value is the purchase price. However, it does not mean that any agreed price is in fact, MV!
The analysis of comparables involve a study of the prices paid for other properties primarily evidenced by agreement for sale documents. Our database is sifted to determine those sales which are relevant for comparison with the subject property; characteristics considered are: how long ago the sale occured, location of the site, size of land and building, construction of building; its type and quality of fittings and finishes…. to name a few. However, because our property market is heterogeneous, seldom will a comparable sale exist which is an absolute match to the subject property. In this regard, adjustments are made to account for differences between the subject and the comparable property(ies).
Ideally, having a collection of sale prices over a particular period of time may provide an insight into the market trend. Such an insight may improve confidence in the reporting of MVs. For example, if No. 1 Main Street sold 5 years ago for $1.0M and evidence (comparables and purchase price) reflect a value of $1.5M, the increase in value can additionally be supported by an upward market trend and can somewhat add validity to the purchase price.
Remember we mentioned the simplified meaning of MV? When is a price not a reflection of MV? Having performed the above described analysis which is supported by evidence, the Valuer may choose to deviate from the actual price being paid for the property.
A more straightforward example would be where only one buyer exists who is prepared to pay a particular price for a property. For instance, if the buyer owns a contiguous parcel of land, a substantial benefit may run with his/her acquisition of the subject by merging it with his/her currently-owned property. In light of this perceived benefit, the purchaser may bid over and above a market price that may be achieved if offered on the open market. This purchaser is therefore a special purchaser and so the price paid or the price he/she is prepared to pay cannot be market value.