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When it comes to Fair Market Value, let’s get real

By Staff | Feb 6, 2009

An agent of Caldwell Banker was recently quoted by the Martinsburg Journal “Real Estate values as a whole have declined and with few sales occurring Real Estate Appraisers are forced to use foreclosures as comparable sales, when determining value.” As a retired Federal Review Appraiser, Federal Real Property Specialist and Planner and a current West Virginia Realtor, I strongly disagree. If the Appraiser must use Foreclosure Sales to obtain the then current market value of a subject property the Appraiser is not entirely fulfilling the objective of “Fair Market Value.”

The concept of “Fair Market Value” is paramount to the Real Estate community. The definition therefore of Fair Market Value can and does represent different beliefs and assumptions about the marketplace and nature of value. The use of foreclosure sales and short sales can be a very controversial detriment as an ultimate determinate of value.

It is generally agreed that Fair Market Value results from a collective value judgment rather than isolated judgments or occurrences. The most probable asset price is, as of a specified date in time, in cash, or terms equivalent to cash for which a specified property should sell after reasonable market exposure, in a competitive market under all conditions requisite to a fair sale, with the buyer and sellers acting prudently, knowledgeably and with self interest and assuming the price is not affected by undue stimulus nor is under undue stress is Fair Market Value.

The Standard of Appraisal Practice requires and cautions Appraisers to seek the exact definition of the Fair Market Value they are performing their services in. To do less is therefore a disservice not only to the buyer and seller but also the financial institution. Financial Institutions that are dumping houses to the market to simply liquidate the asset are therefore doing the market a great disservice by placing undue stress on the market. They are also affecting the price of homes that are on the market that are not in distress.

The 4 forces that influence the value of Real Property are social, economic, governmental and environmental conditions. These forces are dynamic and exert varying influences on the market. The influence or use on one or the other can affect market price but isolating one, such as foreclosure sales, can have a detrimental effect on true fair market value of an asset. The Appraiser can and should use comparable assets. If the asset is in foreclosure then it would seem prudent to use other foreclosure assets in determining fair market value of the asset but when the asset is not in foreclosure than the use of foreclosure assets is unfair and in my estimation violates Standard Appraisal Practice.

There are 3 Standard approaches to value. They are the Sales Comparison Approach, the Cost Approach and the Income Approach. The most common Residential approach is the Sales Approach however when the market is in distress it is not uncommon to use the Cost Approach if the Appraiser is unable to find recent comparable sales. This is especially true for new construction. When using the Cost Approach depreciation is factored in by the Appraiser to obtain the current Fair Market Value with land being estimated separately. With this in mind it would then seem to me that the use of the Cost approach would create more of a Fair Market Value when the market is in distress like it is now if the Appraiser is unable to find comparable non-distress sales. The use of foreclosures and short sales in determining value removes the equity of a property not unlike the recent demise and devaluation of the stock market and peoples hopes and dreams simply vanish. If we are to turn the housing market around then we need to get real when it comes to value.

Axel Carroll