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For many years appraisers and other real estate experts have questioned the intent of market value. Is it a long-term value? Is it the highest price or the most probable price? Has the marketing period already taken place? Can a "typical" marketing period be both one year and three years for the same property at the same time for two different appraisers?
A basic question still lingers--whether market value is the market price" or the "intrinsic worth" of an asset. Why not both? Two key issues face the appraisal industry:
1. Credible value definitions that serve the investing public, lenders, private investors, pension funds, government agencies, and regulators are needed. Market value is not the universal panacea to all real estate value questions. The Appraisal Institute needs to promote the use of other values.
2. The administration of the valuation process needs to be autonomous. The reporting responsibilities of appraisal review groups in banks, insurance companies, and other institutions should take responsibility for the quality of work and investment decisions. Chief appraisers should report directly to the investment board, president, or general counsel, and should not be compensated according to production or favorable valuations.
With the dramatic shifts in the real estate market over the last the years, these issues and value inconsistencies have taken on a renewed sense of priority.
First, let us examine the conventional definition of market value. This definition is mandated for use in federally regulated transactions:
Market value is defined as 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 consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
1. buyer and seller are typically motivated;
2. both parties are well informed or well advised and each acting in what he considers his 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...