Market Value vs. Investment Value: What’s the Difference?

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Market value and investment value are closely related. The investment of a property can be the same as the fair market value or it can be higher or lower. The reason is that market value is relatively objective while investment value is subjective.

Market value or fair market value is defined by The American Society of Appraisers (ASA) as the “price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market.” Generally, it is the price that a typical investor will pay for a property based on its highest and best use.

There are a number of ways to determine fair market value (to be discussed in another article), but the most commonly used for investment properties is the income approach. This involves either discounting future, projected cash flows or applying a market cap rate to the property’s net operating income (Value = NOI / cap rate).

Investment value, on the other hand, is unique to the individual investor and is a matter of perspective. The investment value depends on the motivations of each particular investor and can be tangible (cash flows, sales proceeds, etc.) or intangible (brand recognition).

This is not to say that investors are unconcerned with market value. No one wants to pay more for a property than its fair market value, but an investor may be willing to do so if the investment value exceeds the market value. For example, an investor may pay an above market price for a property adjacent to one they already own to create an assemblage thereby increasing the future market value. In contrast, an investor may not be willing to pay market price for a property because the rate of return is lower than their minimum yield requirements.

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