The Components of Market Value

By
Real Estate Agent with United Real Estate Horizon

I recently had a client stop and ask me what is market value?  I proceeded to explain what market value is and how it is driven or influenced.  I later thought that this would make a good topic to discuss in Active Rain. 

The true definition of market value according to "The Uniform Standards of Professional Appraisal Practice (USPAP) states: 

"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 and knowledgeably, and assuming the price is not affected by undue stimulus."

 The definition of market value assumes an arm's-length transaction.  According to USPAP, this also means:

a.  buyer and seller are typically motivated;

b.  both parties are well informed or well advised, and acting in what they consider their best interests;

c.  a reasonable time is allowed for exposure in the open market;

d.  payment is made in terms of cash in United States dollars in terms of financial arrangements;

e.  the price represents the normal concessions granted be anyone associated with the sale.

 

In order for any real property to have value, there are four well known elements that must be present.  If you have ever been involved in any appraisal education classes, you will never forget these components.  The four elements are demand, utility, scarcity and transferability.  An easy way to remember these elements is to think of the word(DUST).  The element of demand exists when an individual wants the property and has the financial backing to purchase it.  Utility means that the property can provide a useful purpose.  Scarcity is alive when the property is in short supply versus the market demand.  The last element is transferability. Can the title to the property be moved easily from one person to another.  I hope this short note helps you understand how value functions in not only real estate markets, but other commodities as well.  Thank you, Roger White

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