Market Value, Disposition Value or Liquidation Value Appraisal

Real estate appraisals are not all created equally. Those using appraisals often find it necessary to request that the appraiser slice and dice the appraisal in order to solve a specific problem. It may seem like hocus pocus or value manipulation, for a user of an appraisal to request that an appraisal be prepared in such a way, as to change the value conclusion. Some have called it appraisal shopping! Having said all of this, there are perfectly legitimate reasons that an appraiser would prepare an appraisal where a value conclusion is sought, that is different from that of Market Value. Market Value is the value typically used for most appraisal applications under normal circumstances. However, some conditions dictate a different value than that of market.

So what is Market Value anyway? What makes Market Value, Market Value? First let’s look a the definition of Market Value. Some accounts of the definition of this differ slightly from others, depending upon which source one seeks. One of the most respected sources of appraisal definitions is that of the Appraisal Institute’s, The Dictionary of Real Estate Appraisal, 6th Edition. Definitions included in this report will be derived from there.

Market Value: “The most probable price, as of a specific date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specific property right should sell after reasonable exposure in a competitive market, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeable, and for self-interest, and assuming that neither is under undue duress.”

At first blush, after reading the definition, one may ask what is wrong with using this definition for most any conceivable situation, where knowing the value of a property is the primary concern? This definition would appear to represent a thorough and fair depiction of how one would always go about deciding the value of a property. As a valuation consultant, I can assure you that it does not. In addition to Market Value, there are many other values including but not limited to Disposition Value, Liquidation Value, Fair Market Value, Value in Use, Value in Exchange, Insurable Value, Marketable Cash Value, Replacement Value, Actual Cash Value, etc. Why all of these values? Each one has a specific purpose and intended use. We are most familiar with Market Value because it is the most widely used, especially in the mortgage loan industry. Two other types of value are also used in the lending and banking industries, these include Disposition Value and Liquidation Value. For purposes of this writing we will focus on these values as they relate to Market Value.

Let’s assume that you are a banker, and you suddenly find that you have taken title to a property through a foreclosure process. In reviewing the Market Value appraisal for the property, you find that the appraiser has assigned a Market Value of $500,000 and a time for marketing the property of 36 months. You as the banker, do not want to hold properties that are not producing income for such long periods of time. So, you ask the appraiser what the value of the property would be, if we expect to fast track a sale to an investor in an estimated six months or to auction it over approximately the next two months. Both of these scenarios will require the appraiser to appraise the property using different values as defined below. Our appraiser advises you that for the six month fast track investor, the value sought should be Disposition Value and for the two month auction, the value sought should be Liquidation Value. See these definitions below.

Disposition Value: “The most probable price that a specific interest in a property should bring under the following conditions.”

1. Consummation of a sale within a specified period of time, which is shorter than the typical exposure time for such a property in that market.
2. The property is subjected to market conditions prevailing as of the date of valuation.
3. Both buyer and seller are acting prudently and knowledgeably.
4. The seller is under compulsion to sell.
5. The buyer is typically motivated.
6. Both parties are acting in what they consider to be their best interest.
7. An adequate marketing effort will be made during the exposure time.
8. Payment will be made in cash in US dollars (or local currency) or in terms of financial arrangements comparable thereto.
9. 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.

Liquidation Value: “The most probable price that a specific interest in property should bring under the following conditions.”

1. Consummation of a sale within a short time period.
2. The property is subjected to market conditions prevailing as of the date of valuation.
3. Both buyer and seller are acting prudently and knowledgeably.
4. The seller is under extreme compulsion to sell.
5. The buyer is typically motivated.
6. Both parties are acting in what they consider to be their best interest.
7. A normal marketing effort is not possible due to the brief exposure time.
8. Payment will be made in cash in US dollars (or local currency) or in terms of financial arrangements comparable thereto.
9. 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.

Note that the two definitions are very similar with only a few words difference. The differences only occur in items one, four and seven. In item one, the difference is basically between “shorter than the typical exposure time” in Disposition Value and “a short time period” in the Liquidation Value. In item four, the only difference is between “under compulsion”, in Disposition Value and “under extreme compulsion”, in the Liquidation Value. In item seven the differences are between “adequate marketing effort” in Disposition Value and “a normal marketing effort is not possible” in the Liquidation Value. In a nutshell, the only differences are in the amount of time a property is offered for sale, the degree of motivation of the seller and the amount of marketing effort. Conversely, Market Value assumes normal marketing time and marketing effort, such as when offered for sale by a Realtor and a typically motivated seller. These few differences in the words can make a significant difference in the final value of a property in each value scenario. It is the job of the appraiser to determine just how much difference the issues make in the marketing of the property.

In the end, an example of the array of values which an appraiser may provide may look something like this:

Market Value

$500,000

Disposition Value

$425,000

Liquidation Value

$350,000

Of course, these values and their relationship will vary at any given time, with any given property.

Charlie Elliott, MAI, ASA, SRA, a Certified General Appraiser is the founder of ELLIOTT & Company Appraisers. Elliott & Company is an Appraisal Management Company specializing in complex title claim valuations for the title insurance industry. Mr. Elliott is not an attorney and nothing contained herein should be construed as a legal opinion or legal advice. All statements and opinions contained herein are those developed by Mr. Elliott given his three decades of education, training and experience as a complex property appraiser.