There are numerous definitions of market value. For purposes of this monograph, please assume the standard Fannie Mae definition (here by reference). But what stands out are the first seven words of Fannie’s definition: “[m]arket value is the most probable price…,” (emphasis added) a definition that places value firmly on the pedestal of sales price. The idea that price and value are not synonymous is valid, one this monograph refutes.
Now, compare and contrast the above definition with the definition of highest and best use. From the 6th ed. of The Dictionary of Real Estate Appraisal, p. 109, it is clear that a property’s highest and best use is the
“…reasonably probable use of a property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity” (italics added).
However, in the 15th ed. of The Appraisal of Real Estate, at p. 305, is the definition that the highest and best use of a property is simply “[t]he reasonably probable use of property that results in the highest value”. In the paragraph following the definition (ibid.), the 15th edition places that definition in the context of the four criteria. However, they are not components of the definition. In other words, the definition stands alone.
With this introduction, it is the purpose of this monograph to examine, and then reconcile, the conflict between the two definitions. This conflict is not only price versus value. It is also that highest and best use assumes the use of the land that brings the highest value. Whereas the definition of market value assumes the most probable [sales] price. Prima fasciae, the two might seem mutually exclusive. It will soon be clear though, this is not true. Indeed, the appraiser’s analyses of highest and best use (i.e., the highest value) are the precedent for the appraiser’s opinion of market value (most probable [sales] price). In other words, the appraiser cannot conclude a market value until the appraiser analyzes numerous comparable, competing sales.
Appraisers understand there are four components to value. These are demand, utility, scarcity, and transferability. As part of the highest and best use element of an appraisal, the appraiser analyses these four components. Then, the appraiser synthesizes these four components into a highest and best use conclusion. This is true for the site as if vacant, as well as the site as improved. Once the appraiser understands that single use that brings the highest value to the property, the appraiser can then begin the search for sales that, too, met these four criteria.
Via the verification process, the appraiser determines which of those sales complied with the requirements of the definition of market value. When the appraiser has enough market evidence to conclude a sale (i) has the same highest and best use as the subject, and (ii) complies with the components of the definition of market value, then the appraiser has a pool of comparable sales from which to synthesize an opinion of the subject’s most probable [sales] price.
By this time in the appraisal process, the appraiser has exercised sufficient due diligence (i.e., found enough comparable sales) to understand that price and value are not equal. But the appraiser also understands that a property’s sales price functions as a proxy for its market value since the appraiser has no other way to measure that number. A price is both a fixed reference point and an established historical fact. A property’s market value is the appraiser’s opinion. It did not exist until the appraiser first thought it into being. Even after that thought-genesis, it exists as merely an opinion – an idea – since it is really nothing more than a guess that the appraiser concluded after subjecting the comparable sales data to intense reasoning and deductive logic.
And it is in the appraisal process, in letting the sales price proxy the market value, that the appraiser reconciles the conflict between the most probable sales price of market value and the highest value of highest and best use. When the appraiser analyzes highest and best use, the appraiser lets the market indicate the uses (i.e., the demand) which best utilize the site (i.e., which brings the highest value). When it comes to utility, if a particular use of a site provides no utility, if it satisfies no human need, there will be no demand for it. If there be no demand for a particular land use, then scarcity is irrelevant. And that a property was capable of transfer is clear from the fact the comparable sales traded at a specific price, under specific conditions, between the seller and buyer.
Any monograph such as this must end where it began. It began with a summary of the definitions of highest and best use versus the definition of market value. These definitions, prima fasciae, are at odds with each other. How can market value be a function of price since price is not value? Then, how does highest and best use, which assumes the highest value, have anything to do with the most probable [sales] price?
This monograph shows the appraiser uses the sales prices of sufficient individual comparable sales as proxies for the subject’s market value. Price is an historical, verifiable fact; an opinion is merely an idea, something of no tangibility at all. Therefore, the appraiser lets the known facts of sales prices from numerous individual comparable sales proxy the still-to-be-formed idea of one subject property’s market value.
Therefore, it is clear price and value are not synonymous. However, given the relationship there is between a property’s highest and best use and its market value, appraisers understand that prices proxy value. Then, once the appraiser has a sufficient number of proxies, the appraiser is able to synthesize these proxies, these verified, historical facts, into a market value opinion.
In reality, there is no conflict between the definitions of market value and the definition of highest and best use. They merely allow the appraiser to substitute (to proxy) enough facts until, from those proxies, a pattern emerges from which the appraiser can synthesize an opinion of value.
The Appraisal Institute. (2015). The Dictionary of Real Estate Appraisal, 6th ed. (6th ed.). (E. Ruzich, Ed.) Chicago: The Appraisal Institute.
The Appraisal Institute. (2020). The Appraisal of Real Estate, 15th ed. Chicago: The Appraisal Institute.
The Appraisal Standards Board. (2020). Uniform Standards of Professional Appraisal Practice, 2020-2021 Edition. The Appraisal Foundation.