In the Cabinet of Ministers Resolution resolution, which called “National Evaluation Standard №1”, clearly definition the market value. But we will try to define this concept in this article, on easy and understandable way.
How does the price differ from the cost
Let’s start with what is the price and what is the cost. Price is an actual amount of money, which passes from buyer to seller for a particular product or service. So the price is a specific fact. The price for a product may well be inadequate, for example, in advertising shops often written “buy two shampoos and get a balm as a gift” or “buy a set of rubber and get a free spare tire”. And then it is written with small letters that the gift means the possibility of buying the specified product at a price, for example, one penny. That is, the price of the product on the share will be paid 1 penny, although it is clear that the cost of this unit is significantly higher.
In this way, now we can answer what is the cost. Cost versus price is an estimate, not an actual value , which reflects the monetary value of some property. In the previous example, the value of a promotional balm or a tyre can be determined by analyzing the prices of similar goods in other stores. This valuation procedure is referred to as a comparative valuation approach.
As if the price and the cost we have been solved, so now it is possible to move on to the definition of market value. The market value of the property is the price that will equally benefit the buyer and the seller. That is the maximum that the buyer agrees to give, and the minimum for which the seller agrees to sell the goods. It is understandable that all this is just if both sides act knowingly, without coercion and without much haste.
How to find out the market value
There are only three approaches to determining the market value of any type of property:
- Market approach. Based on the comparison of the prices of the offer for similar property. Also this approach is called comparative. The gist of it is that your property is worth about the same as something similar is offered for sale. Of course, this is very simplified, but the general logic is clear. Another thing is that finding an adequate analogue for some types of real estate is not always an easy task. Especially not one, but several. In addition, since each object is unique in its own way, appraisers make adjustments to the cost depending on the main characteristics of the property. For example, differences in the physical condition and interior decoration of the premises (level of repair) between the object of appraisal and analogues.
- Income approach. Determines the cost of the property based on the income it can bring to its owner. This approach is often used when conducting real estate evaluation. To understand how this works, we can draw an analogy with a regular bank deposit. If we know how much income the deposit brings in per month and what its interest rate is, we can determine the size of the deposit itself. In the same way, we can calculate the amount for which the property can be rented out. To do this, it is enough to study the advertisements with rental rates for similar properties. And after that, knowing the possible rental payments, it is not difficult to determine the market value of the property itself. Of course, the question arises of how to determine the interest rate for such calculations (by analogy with the same deposit). However, these are already technical details, appraisers can easily handle this. 🙂
- The cost approach is perhaps the most controversial in terms of market value. The essence of the method is to take into account all the costs of creating such a facility and subtract different types of wear. The approach may not always adequately answer the question “how much property can be sold”, but rather answer on the questions “how much is it worth to create a new facility” and “how much is it worth to repair it”. For all its faults, this approach has been applied, in particular, while doing valuation of equipments and stock assessment.
What other types of cost are here
At the end of the article, it is also should be mentioned that in some provisions of the Tax Code (specifically in the section on the imposition of income tax on the sale of real estate by individuals) the market value is called “evaluation”. And in accounting standards for fixed asset valuation it mention like “fair value”. About what other types of value (except market) we recommend to read in the article «What is the value that the appraiser determines».
