Market Value
The most common valuation method is market value, the amount that a property is worth based on what similar properties in the area have recently sold for and what buyers will pay for it. If you are listing a property, you want to determine the market value by looking at recent sales and properties with the same basic features as your listing. You can make adjustments for differences between properties or recent changes in the market.
For instance, if your home has a finished basement and the comparable properties do not, your home will be worth more than the comps. Or if there has been an increase in demand for homes in the last 30 days, your property may be worth more than a comparable property that was sold 60 days before. The key to market value is that your property is worth what buyers are willing to pay for it.
Investment Value
Investment value is what a specific investor believes a property is worth. Let's say your client, Tim, is looking at a property that meets his criteria for an investment: it's a commercial property in a high-traffic area, he can add on to the building and create four more office complexes, and he can get financing on the property. This investment has more value to him than to an investor who only wants to invest in apartment complexes. Tim may pay more than another investor for this property because it fits his needs.
Assessed Value
Every property has property taxes that the owner must pay. The amount of taxes due is based on the assessed value, the value the tax department places on the real estate that is used to calculate the amount of taxes due. Typically, the department will take the market value of your home and multiply it by a percentage to get the assessed value.
Sue, your client who just bought a home, calculated her property taxes by taking the tax rate of her county and multiplying that times the assessed value of the home. For instance, if her home has a market value of $200,000 and the property is assessed at 40% of value, the assessed value of Sue's home is $80,000. The tax rate in Sue's county is 2.5%. To calculate her taxes, she will multiply $80,000 times 2.5%. Her taxes will be $2,000.
Value in Use
Value in use is the net present value based on cash flow or other return on the property. If Tim valued his commercial property based on what he could rent the units for, he would be using the value in use method. It's based on how much return he can get for what he must pay for the property. Usually value in use is lower than market value.
Lesson Summary
There are many ways to determine the value of real estate. Market value is based on what the buyer is willing to pay and what similar properties have recently sold for. Investment value is the amount an investor is willing to pay or feels a property is worth. Assessed value is the real estate value used for calculating property taxes. Value in use is based on what the return on investment will be for the owner.
