Different Types of Value on the Real Estate License Exam
Value is value, you say. How could there be different types of value? In most cases you’re correct. However, for the Real Estate License Exam, you will need to know about the different types of value regarding real estate. The type of value that appraisers usually deal with is called market value. But other kinds of value may be unique to a particular situation or a particular person.
Market value is the type of value most often covered in real estate exams. Being able to at least distinguish among other types of value is important for test purposes.
Market value is the value that appraisers deal with most often. It’s the value we’re most often concerned with in the typical real estate transaction. Typical is a key word here. A typical buyer and a typical seller will establish market value with the price the seller is willing to sell for and the buyer is willing to pay.
Keep in mind that both seller and buyer typically know as much about the property as they can, have access to needed expertise like attorneys or home inspectors, act in response to typical motives like wanting a house to live in, and have sufficient time to look at a number of properties. Anything that changes these typical motivations may change the sale price of real estate but not its value.
For example, the old family homestead where your grandfather grew up is on the market and you just have to have it for sentimental reasons. Its market value is $150,000. But because you’re so anxious to get it you offer and pay $200,000 for it. Its market value is still $150,000 even though the price paid is $200,000.
Why? Because your motivation was personal, not typical. Typical buyers would have paid no more than $150,000, because they’d see it only as a normal place to live.
A sale meeting the market value criteria also presumes what is known as an arm’s length transaction. An arm’s length transaction implies that no relationship exists between the parties and that the buyer and seller each act in his or her own best interest. So buying your brother’s house wouldn’t be considered an arm’s length transaction. Most exams ask for this definition, in relation to market value.
Value in use
Value in use is the value a property has to a specific person who may use it for a specific purpose that’s generally unavailable to the typical buyer.
Suppose a doctor obtains special permission to use two rooms in a house as a medical office. The typical buyer looks at such a house and puts a value on those rooms for personal use, such as a family room or den; however, another doctor looking at that property may be willing to pay a higher price because of his ability to use those rooms as a medical office.
Investment value is the value to a specific investor with a specific plan for the property. Unlike value in use, which generally presupposes a use already in place, investment value assumes a use that may be proposed.
Investor A may be willing to pay $3 million for a warehouse to be used as a warehouse. Investor B wants to convert the warehouse to a multiscreen movie theater. Investor B may want to pay only $2 million for the warehouse because of the additional expenses for the movie theater conversion project. Investor B probably would look for another piece of property that meets his investment criteria.
Assessed value is the value placed on a property for tax purposes. It is associated with the term ad valorem, which means according to the value.