What is the Market Value of a property versus the Sale Price? by Roger Stanway, Registered Valuer, Holt Commercial
When it comes to valuing commercial property, one of the most frequently asked questions is why doesn’t the ‘market value’ match the asking price or the final sale price?
It’s a natural thing to ask when property owners potentially see two or more different figures attached to the same building.
A property can have several different values including market value, worth, sale price, building cost (for insurance purposes) and fair value or existing use value (both used for financial accounting) amongst others.
When putting a property on the market for sale, an agent will forecast what the sale price might be taking into account the demand in the market place and the supply, or lack of it, as well as the advantages or disadvantages of the particular property. Of course, the plan is to get the best price possible for the client whilst managing expectations.
However, valuing a property is a different discipline, usually undertaken on behalf of a bank, other lending institution, a pension fund or for tax planning purposes.
Valuations are also required for other purposes such as probate, financial and management accounting, for divorce, for purchase, shared equity and so on, but in the majority of these cases the valuation must be undertaken by an RICS Registered Valuer.
These are Chartered Surveyors experienced in undertaking valuations and approved by the Royal Institution of Chartered Surveyors (RICS). When undertaking these types of valuations, RICS Registered Valuers such as myself and my, colleague Andrew Oliver, here at Holt Commercial, have to follow Professional Global Valuation Standards maintained and regulated by the RICS.
One of the main tenets of these standards is that we are unable to anticipate what the market is going to do in the future as we are valuing at a specific date in the past. Thus, the valuation will reflect the market state and conditions at the valuation date and not at any other time.
Consequently, we base our valuations on what has already happened in the market before the valuation date and we use historical or empirical evidence from a number of different information sources as comparables to ensure that the valuation we give is backed up by facts rather than predictions.
This takes time and expertise and also requires each valuation we undertake to be peer reviewed by another RICS Registered Valuer as an additional safeguard.
Market Value which is explained in ‘RICS Valuation – Global Standards’ (sometimes known as the ‘Red Book’) is based on a set of assumptions, which may or may not be true – but we have to apply them when undertaking a valuation.
These assumptions state that market value is an estimated amount being the most probable price reasonably obtainable in the market. It is not a predetermined amount neither is it the actual sale price.
Another assumption we have to make is that the buyer is prudent and has knowledge of the market – ie, they will have undertaken their research and therefore will not pay just any price for the property. Whilst the willing buyer is deemed motivated to buy, they are not compelled to buy or determined to buy at any price. This can be very different from the real market.
Also, we assume the seller, who also has knowledge of the market, will not accept the first bid they receive and will look at a spread of bids, taking into account matters such as the ability to pay, rather than just taking the highest price.
Thus, we ignore the motivations of the seller who is anxious, coerced or forced to sell. We also ignore the worth of the property to the seller as attempting to estimate worth can be a completely different value to market value. Again, this can be very different from the real market.
We are unable to take into account a bid from what is known as a ‘special purchaser’. For example, a buyer that already owns property and wants to buy the neighbouring unit, might be willing to pay a bit more for various reasons. However we are unable to take account of that ‘special purchasers’ bid in our valuation. In the real market however, this occurs frequently and is normally reflected in a much higher price paid than the market value might be.
In the same way as a special purchaser, we are unable to reflect the bid from a buyer who is related to the seller as the hypothetical exchange of the asset is deemed to be between parties who are at “arm’s length”. Furthermore, the sale or exchange of the asset is deemed to occur after proper marketing has taken place, thus discounting private sales.
At all times our work is completely impartial, evidence-based and requires us to be RICS registered. We follow professional standards and our own processes are rigorous. We always aim to give fair, balanced and prudent valuation advice to our clients.
It’s a crucial area of the commercial property market and, there is no question, that we require more people to come into this area of the profession because it is crucial for a fair and functioning commercial property market.