Market Value: The two key words you cannot ignore in real estate

Market Value is defined as: “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 wherein the parties had each acted knowledgeably, prudently and without compulsion”.

Market value is a concept of the market. Market is the meeting place for sellers and buyers. Sellers go to the market to exchange their products for money or money’s worth. Buyers go to the market to get the products sellers have after paying for them. There are many sellers in the market selling similar products and many buyers looking for same or similar products. While no seller is bound to sell to a particular buyer, equally no buyer is bound to buy from a particular seller. The seller will accept only the best price (interpreted as the highest) for his product and the buyer will only accept the product from the seller offering the best price (interpreted as the lowest). Buyers will compete among themselves to obtain the products and thereby pushing the prices higher. Sellers will on the other hand compete among themselves to sell as much as possible thereby lowering the prices. This is what is referred to as the market forces. The market forces therefore determines what the value of the property will be in the market.

The conceptual framework of the market value definition

The following is the explanation of the market value definition above.

The estimated amount: The valuation figure is an estimate since no actual transaction is taking place. The valuer is simply giving an opinion on the worth of a property after a scientific process. The standard methods of valuation are market approach, income approach and cost approach. The value should not be taken to mean the price. Price is the actual amount paid for an item. Value is simply an opinion and may be higher or lower than the actual amount paid for an item – price.

– should exchange: An exchange refers to a transaction. It is assumed that the property is moving from the seller to the buyer after payment.

– on the valuation date: The valuation figure is only valid as at the specified date. Market place is dynamic with parties and products quickly changing. Since we are estimating a figure, it can only be specific at a given time. As the market changes so does the value.

– a willing buyer and a willing seller: In the market, sellers and buyers act on their own free will. The seller and the buyer must be prepared to do what motivates them to make the journey to the market place – to sell at the best return or buy at the best bargain.

– in an arm’s-length transaction: If for one reason or another, you seem to favour one party over the other, e.g. your brother, sister, relative or subsidiary company that is not arm’s length. For sure you do not need to go to the market for such transaction. If you go to the market and you turn choosy, that is also not arm’s length. An arm’s length transaction is one between unrelated parties.

– after proper marketing: The assumption here is that all buyers as well as all sellers in the market place are aware of the property on sale. This can only be achieved through marketing using appropriate communication channels. Without proper marketing, you will only reach a section of the market thus excluding other players in the market.

– the parties had each acted knowledgeably: An ignorant seller does not know if the price is good for his product or not. He is likely to undersell in the market or totally miss an opportunity to sell because of overpricing. An ignorant buyer is likely to overpay for a product. For a transaction to be market, both parties must understand the benefits of the product to them and have carried out research on the prices of similar products in the market.

– and prudently: You only buy what satisfies your needs. You spend only if you have to, and not more, not less. You behave rationally when faced with choices.

– and without compulsion: In the market no one forces you to sell or buy. There are many sellers to choose from, or buyers to sell to. If you are forced, coerced or intimidated to sell or to buy for sure you do not have to do it in the market place.

Stephen Omengo
Registered Valuer, Registered Estate Agent & Registered EIA Expert
Firm: Tysons Limited, Nairobi-Kenya
Blog: www.StephenOmengo.com
Personal email: stephen@StephenOmengo.com

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