4 “Other” Property Valuation Methods

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I’ve discussed the difference between market value and investment value. Basically it’s a matter of perspective. Market value is the price that the average investor would pay for an asset while the investment value is the price that a particular investor would pay based on a number of factors including their required rate of return, tax rate, etc.

Market value is the most commonly used metric in commercial real estate analysis; however, other questions and decisions require the use of other valuation methods. Here are 4 additional methods used in real estate valuation analysis:

  1. Insurable value – the replacement cost or actual cash value of the portions of a property that are physically destructible. Insurable value is less than market value because it excludes the value of the land upon which the property sits.
  2. Assessed value – the value of the real estate as established by the tax assessor for purposes of levying local taxes. The assessed value is typically lower than the market value of the property, but this depends on the assessing body’s methodology and assessment to sales ratio (ASR).
  3. Liquidation value – the likely price resulting from a forced sale (foreclosure, bankruptcy, or tax sale) or one in which sales terms and/or other conditions may depress the price or limit its time on the market.
  4. Fair value – the likely price resulting from a sale under all conditions requisite to a fair sale (buyer and seller are each acting prudently, knowledgeably, and under no necessity to buy or sell). Fair value and market value are sometimes used interchangeably; however, the difference is the term “knowledgeable.” Market value does not imply that both parties are knowledgeable, only that the buyer and seller are willing and that it be an arm’s-length transaction.

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