Why does defining “value” in an appraisal matter?

The definition of value in an appraisal report matters greatly. Most appraisals geared toward loans for Fannie Mae will use a typical Fannie Mae definition for market value. But this definition for value is not used in appraisals for other purposes. Let’s take a quick look below.

Fannie Mae Definition: Market value is 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 the 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 represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

What other definitions exist? As an example, I have one client who wants an established value for a 45-day sale. Or in other words, what is the value today based on properties having sold in only 45 days? This value is really a  “quick sale” value to help them sell off their foreclosure inventory – not market value as defined by Fannie Mae. Or I have another client that wants to get an idea of what a 90-day value would be in the future. Or in other words, how much would this property sell for in 90 days from now (theoretically)? Additionally, other clients want a retrospective value, which is a value based on a date in the past. This type of value is often used for “date of death appraisals” and used in most estate settlement situations.

Did you know the IRS has their own definition of fair market value? This definition should be used in estate settlement appraisals since the end-user of the report is the IRS. These types of appraisals are ordered for tax purposes.

IRS Definition: Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. IRS Publication 561

What’s the big deal? I bring this up because the definition of value will impact the appraised value. For example, if a normal marketing period is 60 or 90 days, but a client is requesting a 45-day value, the appraised value will likely be less than market value to speed up the sales process, right? Ultimately, it’s important for the appraiser and client to be able to agree upon the definition of value and understand what is being asked of the appraiser. The definition of value will ultimately guide what the appraiser is really looking for.

This is a no-brainer when it comes to doing typical loan appraisals because the Fannie Mae definition will likely be used, but in other private appraisal situations it is something that needs to be figured out (maybe for divorce or estate settlement). Home owners really shouldn’t worry about technical terms or finding the appropriate value definition though because any competent appraiser should be able to understand what the home owner is looking for after asking the right questions.

If you have any questions, or real estate appraisal or property tax appeal needs in the Greater Sacramento Region, contact Lundquist Appraisal by phone 916-595-3735, email, Facebook, Twitter or subscribe to posts by email.


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