06 Jul Concepts of Price and Worth in Real Estate
Market Value
In real estate, Market Value is the estimated amount for which an asset should exchange on the date of valuation 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.
Investment Value
According to the Red Book paragraph 1.4.1 (IVS Framework paragraph 36) the Investment Value is defined as “the value of an asset to the owner or a prospective owner for individual investment or operational objectives.” Investment Value may also be known as worth. IVS Framework paragraph 37 provides further commentary on this definition:
“This is an entity-specific basis of value. Although the value of a real estate asset to the owner may be the same as the amount that could be realised from its sale to another party, this basis of value reflects the benefits received by an entity from holding the asset and, therefore, does not necessarily involve a hypothetical exchange. The concept of investment value reflects the circumstances and financial objectives of the entity for which the valuation is being produced. It is often used for measuring investment performance. Differences between the Investment Value of an asset and its market value provide the motivation for buyers or sellers to enter the marketplace.”
Practical Outcomes
The distinction between investment value and market value gives rise to the following practical outcomes:
- Market Value is usually comparable based. It has theoretically one objective figure (there is a market price) but practically it is a point on a distribution of possible values found by the individual valuer. Most probable selling price.
- Investment value is usually worth based with references explicitly to a Discounted Cash Flow (DCF) model. Theoretically, it can be different for each individual or group of investors; practically each estimate is also a point in a distribution.
Summary concepts Price and Worth in Real Estate
The concepts of price and worth are summarised below:
- Market Price – Price that is actually paid
- Market Value – Estimate of what that exchange price might be in a defined market
- Market Worth – Estimate of worth to a section of the market who could make up the whole market
- Individual Worth – What an interest is worth to an individual
- Sustainable value – Value sustainable through time
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