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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Discover an insightful new text covering advanced problems in real property valuation
In Advanced Issues in Property Valuation, real estate valuation experts and authors Hans Lind and Bo Nordlund provide a deep understanding of the concepts, theories, methods and controversies in property valuation. The book introduces readers to controversies and discussions in real estate valuation, including the relevance of market value for valuation for lending purposes, how uncertainty in property valuations should be interpreted, and the relationship between market value and fair value in financial reporting.
Readers will also benefit from the inclusion of:
- A thorough introduction to the concepts, theories, methods and problems in real estate property valuation
- An exploration of the relevance of market value for valuation for lending purposes
- A practical discussion of how uncertainty in property valuations should be interpreted
- A concise treatment of the relationship between market value and fair value in financial reporting
- An examination of how concerns about sustainability and other structural changes can affect property valuation
Perfect for graduate level students in courses involving valuation or real estate, Advanced Issues in Property Valuation is also an excellent resource for real estate practitioners who wish to update and deepen their knowledge about property valuation.
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Table of Contents
Cover
Title Page
Copyright Page
Preface
1 Introduction
1.1 The General Purpose of the Book
1.2 Overview of Issues Covered
1.3 How the Book Can be Used
2 The Concept of Market Value
2.1 Introduction
2.2 Standard Definition
2.3 Criteria for a Good Definition: Clear, Measurable, Concise and Relevant
2.4 Problem 1: ‘Estimated Price’ or ‘Most Probable Price’?
2.5 Problem 2: Shall the Definition Refer to a Competitive Market?
2.6 Problem 3: Should the Definition Refer to Prudent and Knowledgeable Actors?
2.7 Problem 4: Should the Definition Include a Reference to Willing Seller and Willing Buyer?
2.8 Problem 5: Market Value and Turnover
2.9 Highest and Best Use
2.10 Conclusion
Exercises
3 Finding the Market Value: What Is a Valuation Method and How Should the Methods Be Categorized?
3.1 Introduction and Overview
3.2 The Three Classic Valuation Approaches/Methods
3.3 A Problem with the Standard Classifications
3.4 The Information Base of a Valuation
3.5 A Different Way to Classify Valuation Methods
3.6 Adjustment Methods
3.7 Why Is Regression Analysis (Hedonic Methods) Seldom Used in Ordinary Valuations?
3.8 What Is Really the Cash‐Flow Method?
3.9 Valuation of Development Properties and Option Aspects
3.10 Use of Different Methods in the Valuation of a Specific Object: Concluding Comments
Exercises
4 Uncertainty and Bias in Property Valuations
4.1 Introduction
4.2 Valuation Variance: Why Do Valuers Disagree?
4.3 Valuation Accuracy: Why Do the Observed Price Differ from the Market Value?
4.4 How Confident Is the Valuer in the Estimated Market Value?
4.5 How Stable Is the Estimated Market Value?
4.6 Client Influence and Bias
4.7 Behavioural Factors
4.8 Valuation Smoothing
4.9 How Self‐Selection Can Lead to ‘Bias’
4.10 Possible Policy Recommendations
4.11 Concluding Comments
Exercises
5 Valuation for Lending Purposes and Long‐Term Value Concepts
5.1 Introduction
5.2 Two Competing Theories About Predictability of Property Prices
5.3 Price Bubbles on the Real Estate Market
5.4 The Leverage Cycles and Bank Incentives
5.5 Use Market Value, Make Risk Analysis and Adjust the Loan‐to‐Value Ratio (LTV‐Ratio)
5.6 ‘Long‐Run Value’ as an Alternative
5.7 Alternative Value Concept (1) Mortgage Lending Value
5.8 Alternative Value Concept (2) Worth or (Normalized) Investment Value
5.9 Derivatives of Market Value
5.10 Cost‐Based Value Concepts
5.11 Final Comment: Can Valuation Methods and Credit Rules Affect the Property Cycle?
Exercises
6 Valuation for Financial Reports and Other Accounting‐Related Issues
6.1 Introduction
6.2 The Fair Value Concept
6.3 The Fair Value Hierarchy, Disclosure Requirements and the Risk for Bias
6.4 Valuation of Public Sector Properties
6.5 Property Depreciation, Refurbishments and Free Cash Flows to the Property Firm
6.6 Auditing and Quality Assurance of Fair Values in Financial Reporting
6.7 Concluding Comments About Fair Values
Exercises
7 Property Valuation and Sustainable Buildings
7.1 Introduction
7.2 What Is a Green/Sustainable Building – on Environmental Certification Systems
7.3 How Sustainability Can Affect Property Values
7.4 Valuation Methods and Sustainable Buildings
7.5 The Relation Between Values of ‘Green’ and ‘Brown’ Buildings
7.6 Concluding Comments
Exercises
8 Transparency Issues
8.1 Transparent and Rational Markets
8.2 Transparent Valuation Reports
8.3 Concluding Comments
Exercises
9 Valuation Ethics, the Role of the Valuer and Governance
9.1 The Importance of Valuation and Basic Ethical Rules
9.2 The Responsibility of Valuers and Valuation Firms
9.3 Authorization/Certification of Valuers
9.4 Concluding Comments
Exercises
10 Property Valuation in the Future
10.1 Technological Development
10.2 Structural Changes in Society: Corona‐Pandemic as an Example
10.3 Radical Uncertainty and Property Valuation
Exercises
Appendix A: Can the Value of a Property Be Divided into Value of the Parts?
A.1 Introduction
A.2 Dividing the Value into Land Value and Building Value for Homes and Commercial Buildings
A.3 Dividing the Value into Farmland and Farm Buildings
A.4 Dividing the Value into Property Value and ‘Business Enterprise Value’
A.5 Concluding Comment
Exercises
References
Index
End User License Agreement
List of Tables
Chapter 3
Table 3.1 Potentially useful information (1): relatively more objective.
Table 3.2 Potentially useful information (2): relatively more subjective.
Table 3.3 IFRS Fair value hierarchy: quality of inputs.
Chapter 4
Table 4.1 Example of effects on price of the distribution of reservation pric...
Table 4.2 Different degrees of confidence in the estimated market value.
Chapter 5
Table 5.1 Illustration of using a moving average: four‐year average.
Table 5.2 Illustration of using a moving average: six‐year average.
Chapter 6
Table 6.1 Assumed reservation prices.
Chapter 7
Table 7.1 The effect of sustainability on value: an hypothetical example.
Chapter 8
Table 8.1 Most transparent countries 2018.
Chapter 9
Table 9.1 Different types of authorization systems.
List of Illustrations
Chapter 2
Figure 2.1 Price and quantity with an almost horizontal demand curve.
Figure 2.2 Price and quantity with a partly horizontal supply curve.
Guide
Cover Page
Title Page
Copyright Page
Preface
Table of Contents
Begin Reading
Appendix A Can the Value of a Property Be Divided into Value of the Parts?
References
Index
Wiley End User License Agreement
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Advanced Issues in Property Valuation
Hans Lind and Bo Nordlund
This edition first published 2021© 2021 John Wiley & Sons Ltd
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Library of Congress Cataloging‐in‐Publication Data
Names: Lind, H. (Hans), author. | Nordlund, Bo, author.Title: Advanced issues in property valuation : a textbook / Hans Lind, Bo Nordlund.Description: Hoboken, NJ : Wiley‐Blackwell, 2021.Identifiers: LCCN 2021015372 (print) | LCCN 2021015373 (ebook) | ISBN 9781119783367 (paperback) | ISBN 9781119796220 (adobe pdf) | ISBN 9781119796244 (epub)Subjects: LCSH: Real property–Valuation.Classification: LCC HD1387 .L552 2021 (print) | LCC HD1387 (ebook) | DDC 333.33/2–dc23LC record available at https://lccn.loc.gov/2021015372LC ebook record available at https://lccn.loc.gov/2021015373
Cover Design: WileyCover Image: Photographed by MR.ANUJAK JAIMOOK/Getty Images, Brzozowska/E+/Getty Images
Preface
As we have been working with issues related property valuation for many years, there is a large number of people who over the years have influenced our thinking and/or been part of projects that produced some of the research that this book is based on. We would especially like to mention Erik Persson, Stellan Lundström and Christina Gustafsson for many discussions on valuation issues. Neil Crosby is also a person that we have discussed many of these issues with over the years.
Christina Gustafsson should also be thanked for comments on an earlier version and especially the advice to relate the discussion more to documents produced by international organizations like Royal Institute of Chartered Surveyors (RICS) and the International Valuations Standards Council (IVSC). Four anonymous referees should also be thanked for constructive comments on an earlier version.
Finally, we would like to thank all the people at Wiley that have helped us in a constructive and efficient way.
Hans LindBo Nordlund
1Introduction
1.1 The General Purpose of the Book
There are a number of good basic textbooks on property valuation, e.g. Property Valuation by Peter Wyatt or the Appraisal Institute´s classic book The Appraisal of Real Estate.1 These books present basic concepts and valuation methods with a focus on what you need to know to work with valuation issues in the real estate sector, either as a producer of valuations or in a position where you use valuations, and need to understand and evaluate valuations.
This book has been written as a type of ‘advanced’ textbook that problematizes a number of issues that are presented in the basic textbooks. Things in reality are often not as clear as they are in the basic textbooks. There are different views of how useful different concepts and methods really are. Some of the controversies about concepts and methods typically arise in specific episodes on the market, e.g. after a crash on the market or in situations where there seem to be very optimistic views among actors in the market that may raise concerns whether e.g. real estate assets are ‘overvalued’ in the market. Other differences relate to differences between countries and local traditions. Even though there are international cooperation and standardization, such differences still remain. The aim of the book is to introduce readers to these discussions and to make it possible to have well‐informed opinions on these issues. Some advanced textbooks focus on valuation of specific types of properties – from agriculture to hotels or special purpose buildings – but in this book, the focus is on what could be called more theoretical or conceptual issues, but also on some normative issues related to governance and the role of the valuer.
We think that there are at least two different audiences for the book. The first is students in courses on the Master level, where the student has already read one basic course in valuation or in larger basic courses, where the book can be used in the later part of the course. The book should also be useful in other academic courses, e.g. doctoral courses in real estate.
In an economy that changes quickly, there is also a need for courses for real estate practitioners who want to update and deepen their knowledge about property valuation. We have met the opinion that practitioners primarily want ‘cook‐books’ that tell them exactly what to do and that their interest in more conceptual and theoretical issues is limited. As teachers in a large number of such courses, we strongly disagree. In our view, almost everybody wants to understand what they are doing, why things are done in a certain way and alternative ways of looking at things. A broader perspective should also increase creativity and problem‐solving ability for practioners.
1.2 Overview of Issues Covered
The central concept of market value is discussed in Chapter 2. There are several issues that have been discussed concerning market value. Should the definition refer to prudent and knowledgeable actors when actors in the market are not always knowledgeable or prudent? Conditions that a good definition should fulfil are also discussed in this chapter. The connection between price and turnover also creates problems as observed prices alone then do not reflect the situation on the market. Problems with the concept of highest and best use are also discussed.
Other value concepts than market value are discussed in Chapter 5 that covers valuation for lending purposes, and in Chapter 6 about valuation in accounting contexts.
Chapter 3 looks closer at valuation methods. Typically, these are divided into sales comparisons, income and cost methods (or approaches), but what is really the logic behind this division? It is argued that some of the methods that are often called income methods really should be classified as sales comparison methods. A new classification of valuation is sketched. As properties are heterogenous, there are almost always a need to make adjustments for the remaining differences between the property to be valued and the objects compared with. Different such adjustment methods are also described. Finally, two more general issues are discussed in this chapter: Why is regression analysis not used more in property valuation and how can discounted cash flow methods lead to a market value?
Uncertainty and bias in property valuations often come to the fore in discussion about property valuations after a downturn in the market. The old, high valuations are questioned by investors that have lost money, and there is a demand for more discussions about uncertainties in valuations. In Chapter 4, different interpretations of uncertainty and bias are discussed, e.g. that valuers disagree or that observed prices differ from estimated market value. Possible bias caused by client pressure and the stability of the value are also covered together with possible recommendations to improve the quality of valuation from the perspective of giving the reader an idea about how uncertain the estimated market value is.
Chapter 5 analyses valuation for lending purposes and long‐term value concepts. A crucial issue in this context is the predictability of market prices and if price bubbles can be identified in advance. Can the risk for falling prices be handled by adjusting the Loan‐to‐Value ratio or do we need other value concepts than (current) market value? Mortgage lending value and worth are examples of such concepts. The most general question covered is, if rules about valuation can reduce the risk for future real estate‐related crises?
Valuation for accounting purposes and other accounting‐related issues are covered in Chapter 6. The fair value concept and its relation to market value is discussed together with the concepts entry price and exit price and especially how fair value should be interpreted in thin markets. The fair value hierarchy concerning valuation methods is discussed both in this chapter and in Chapter 3. There is also a section about quality in financial reporting.
Sustainability and property valuation is discussed in Chapter 7. What is really meant by a sustainable building and what should we expect to be the difference in value between ‘brown’ and ‘green’ buildings? Are special methods needed for valuing sustainable buildings? What should we expect to happen with the value difference over time?
Chapter 8 is about transparency and property markets. Transparency is an important topic both for the real estate market as such and for the valuation process as reported in valuation reports. It is, however, underlined that there are limits to transparency in both these areas. Having more information than others is something that can lead to higher profits, both for real estate investors and for valuation companies. As property valuers also use experience and a ‘feeling about’ where the market is going, it is hard to make the valuation process completely transparent.
Ethics, the role of the valuer and governance are covered in Chapter 9. Not least because of climate change and other sustainability issues, it is more and more expected that all companies and professional groups take a broader perspective on their activities. Companies formulate sustainability policies and policies about corporate social responsibility (CSR). On the other hand, it is questionable to what extent valuers can ‘lead’ the market. Important issues are also the credibility of valuers and problems caused by asymmetric information including problems for buyers to evaluate the quality of a valuation product. Authorization or certification systems are discussed as one way to reduce these problems.
In Chapter 10, three issues are covered. The first is technological development, e.g. in the form of artificial intelligence systems. The second is possible structural changes caused by unexpected events, illustrated by the corona‐pandemic. The third issue discussed is ideas about ‘radical uncertainty’ and what that might imply for property valuations.
1.3 How the Book Can be Used
Most chapters start with an overview of what is said in basic textbooks, and then discussions from scientific articles are added. In each chapter, central articles are referred to. New articles are continuously published, and it is important that teachers try to update course materials in relation to recent ideas and arguments. Such an update can also be made as student exercises, where students are given the task to find more recent articles and then relate what they find in these texts to what is said in the book.
Knowing local conditions (in a country or region) is always important for students as this is the market where most of them will work in the future. In each chapter, there are a number of specific exercises that can be used in courses. Many of these are of the type ‘Interview local actors about how they look at XX’ or ‘Interview local actors about current problems and controversies about XX’.
Many of the issues discussed are multidimensional and it is not easy to evaluate all aspects and take a stand on the issues. One format that we have found useful and popular among students is ‘Pro and con debates’. In many chapters, there are suggestions about topics for such debates. Students are then divided into teams and should make a presentation arguing either for or against a specific proposition. In a second round, they should present counterarguments to the arguments presented by the opposing team, etc.
Note
1
The list could be made longer and include e.g. Havard (2002), Baum and Crosby (2008), Scarrett and Osborn (2014) and Morri and Benedetto (2019).
2The Concept of Market Value
2.1 Introduction
There are two fundamental value concepts: Market value and Investment value or Worth (IVSC 2019 , p. 17). Investment value is a rather uncomplicated concept as it simply refers to the value from a specific owner's/investor's perspective. This is calculated by a standard investment analysis in the form of a cash‐flow analysis. The inputs are then expected net operating income from that actor's perspective and the rate of return this actor demands and the expected residual value at the end of this actor's expected holding period. Such a residual value is normally calculated from the expected net operating income at the end of the calculation/holding period.
Market value is important in a number of different contexts, e.g. when transactions are made, when property is used as collateral for lending and in financial reports. The fact that this value concept is so important, and as will be clear below, rather complicated, it is important to look closer at the definition of this concept. A number of aspects will be covered in this chapter, but value concepts will also be discussed in Chapter 5, and in Chapter 6. In Chapter 6 the concept of Fair value and its relation to market value will be discussed. It could also be useful to be aware of the distinctions between entry price and exit price explained in that chapter, where entry price at the date of a transaction is what has been paid and exit price what could be fetched if the property is sold at that date.
There are also other economic (value) concepts than market value and investment value that may be relevant in different situations. Examples of such value concepts are acquisition cost/‐value, replacement cost/‐value or long‐term values of different kinds. We will further discuss such value concepts in Chapters 5 and 6.
2.2 Standard Definition
The International Valuation Standards defines market value as follows (IVSC 2019 , p. 18):
Market value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction after proper marketing where the parties had each acted knowledgeably, prudently, and without compulsion.
This definition is also the official one in the United Kingdom and accepted by RICS. In the RICS Valuation – Global standards (RICS 2019 ), the standards from IVSC are included in full as Part 6 of that book.
The US Appraisal Institute presents the following definition (Appraisal Institute 2013 , p. 58):
The most probable price, as of a specified date, in cash or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights 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, knowledgably, and for self‐interest, and assuming that neither is under undue duress.
Looking closer at these definitions, some common elements can be found:
A date of valuation (a measurement date).
Reference to the amount that the property should exchange for after proper marketing (reasonable exposure, in an orderly transaction).
Reference to buyers and sellers acting knowledgably and prudently: this is discussed in
Section 2.4
.
Reference to a willing buyer/willing seller: this is discussed in
Section 2.5
.
But there are also some differences:
The IVSC/RICS definition refers to ‘the
estimated
amount’ while the US definition refers to ‘the
most probable
price’ (discussed in
Section 2.4
).
The US definition refers to ‘a competitive market’ but there is no such reference in the IVSC one: this is discussed in
Section 2.6
).
Another problem that will be discussed in this chapter is the relation between turnover and market price, and whether turnover in some way should be included in the definition (Section 2.8). In both the standards, there is also a discussion about ‘highest and best use’ and this will be discussed in Section 2.9.
2.3 Criteria for a Good Definition: Clear, Measurable, Concise and Relevant
The point of making a definition is to clarify a concept and therefore the words used in the definition must be clear in the sense that they are interpreted and applied in a similar way by different actors.1 If a word is vague, there might be disagreement about whether it is correct to apply it in a specific situation. Additional explanations may sometimes be needed to make sure that the readers will apply the term in the same way and such clarifications can, for example, be found in IVSC (2019 , pp. 18–20).
A second criterion for a good definition is that it refers to things that are measurable, at least in principle. If valuers disagree, it should at least in a number of circumstances be possible to find data that indicate which estimate is closer to the truth. RICS (2019 , p. 2) states that ‘Consistency, objectivity and transparency are fundamental to building and sustaining public confidence and trust in valuation’. Objectivity in the context of a definition could be interpreted as that there exist data/evidence that substantiate at least a claim that the market value is closer to A than to B.
A definition should also be concise and not include terms that do not add any further content to the definition. This condition is sometimes referred to as Occam´s razor, i.e. unnecessary components in the definition should deleted.
The final condition for a good definition of market value is that the definition should lead to a concept that is relevant in the context where the term normally is used. A definition of market value should be such that market value ‐ so defined ‐ will be of interest for potential buyers and sellers thinking about a future transaction, or for measuring the wealth of a company in the balance sheet.
2.4 Problem 1: ‘Estimated Price’ or ‘Most Probable Price’?
As there always are uncertainty about the price that is possible to fetch when selling a specific property at a specific point in time, the formulation ‘most probable price’ seems to be the best as this uncertainty then is clear. In IVSC (2019 , p. 18), ‘the estimated amount’ is also explained in terms of ‘the most probable price reasonably obtainable in the market’, even though it is not clear what ‘reasonably obtainable’ adds to the formulation.
This does not, however, solve all problems. Suppose that there are 10 observations from recent transactions of very similar properties. Should the most probable price refer to the mean value or to the median value? If the observations are skewed, there can be rather large differences between the mean and the median. As valuers usually are suspicious against ‘outliers’, the median should perhaps be the most relevant concept.
The next question is how ‘most probable’ should be interpreted in the context of property valuation. As discussed in Lind (1998 ), there are at least two definitions of probability, or two different ways of looking at the concept of probability.
The first is the frequency interpretation of probability. In this interpretation, saying, for example, that the probability is 1/6 to get the number 3 when throwing a dice would simply mean that if the dice is thrown a large number of times, then the result would be a number 3 in 1/6 of the throws.
This interpretation is, however, rather meaningless in a real estate valuation context as it is not practically possible to sell the same property a large number of times during a short period of time. Even in a rather homogenous market, there is a limited number of transactions. Defining the most probable price as the average of the observed prices would be the same as saying that the probability of getting a number 3 is not 1/6 because the frequency of getting number 3 differed from 1/6 in the first 10 throws. With a frequency interpretation of probability, it would therefore not be possible to present convincing evidence whether a certain price is the most probable or not.
A second interpretation of probability is the logical interpretation, where probability measures the degree of confidence that is rationally justified by the available evidence. This interpretation seems very suitable in a property valuation context. When a valuer, for example, asserts that the value is 100, it would in this interpretation mean that given the available evidence it is more rational to believe in a price around 100 than to believe in a price around 90 or around 110. Controversies about the value of a specific property can also typically be seen as controversies about the interpretation of the relevant evidence. A valuation method is from this perspective a method to collect and analyse evidence in order to arrive at rational belief about what the price will be if the property is sold.
The conclusion in this section is then that the formulation ‘most probable price’ is the best one and that it can be explained further by saying that it refers to the price for which there is the strongest arguments, or for which there is the strongest evidence.
2.5 Problem 2: Shall the Definition Refer to a Competitive Market?
A special feature of the Appraisal Institute definition is that it refers to the price in ‘a competitive market’, while there is no such reference in the IVSC definition.
Here, we would side with the IVSC definition, primarily with reference to the criteria that a good definition should be relevant for actors on the market. Actual property markets differ in size and in the number of actors on the market and can be evaluated as more or less competitive. Independently of the level of competition, actors can be expected to be interested in the probable price if a property is to be sold or bought. The conclusion must then be that market value should be defined in such a way that it is applicable independently of how competitive the specific market is. It should be possible to discuss the market value of a unique property and of a property on a thin market, and this means that a reference to ‘a competitive market’ should not be included in the definition of market value.
Including such a condition would also create methodological problems. If market value is defined as the probable price on a competitive market and the current market is not so competitive, there is no observable evidence about the price on the competitive market. Observed prices could not be used directly to make inferences about the market value and that is a big problem as valuation should be based on observable evidence.
2.6 Problem 3: Should the Definition Refer to Prudent and Knowledgeable Actors?
The condition that parties had acted knowledgeably and prudently is clarified in the following way in IVSC (2019 , p. 19–20):
presumed that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the asset, its actual and potential uses, and the state of the market as the valuation date… . the prudent buyer or seller will act in accordance with the best market information available at the time.
There are two problems with including this kind of formulation. First, it raises empirical problems. What is the state of the market? What is the best market information at that time? How can the valuers know what is the best market information available – and what it means to act in accordance with this information? Some actors in the market rely on intuition and gut‐feeling, and is such behaviour inconsistent with being prudent? And if comparative sales are used during the valuation process, how should the valuer find out whether these sales fulfil the conditions that the parties had acted prudently and knowledgeable? We would suggest that there can be large differences in opinion about those issues, both among actors in the market, valuers and followers of the market, especially during boom periods. Robert Shiller argued in a famous book (Shiller 2000 ) that share prices in the late 1990s was based on ‘irrational exuberance’. Some would probably say the same about the property market in many countries during the late 1980s or during the period before the financial crises around 2009. If transactions were carried out by people with ‘irrational exuberance’, those transactions would not be relevant for evaluating the market value at that point in time – if the market value is defined as the expected price given knowledgeable actors. Some of the problems that this leads to will be discussed also in Chapter 5 when the concept mortgage lending value is discussed.
The second argument against including reference to prudent and knowledge actors is the same as the argument against including a reference to competitive markets. In reality, the prudence and knowledge differ between actors, between markets and over time, and the market value concept should be applicable independently of the characteristics of the actors on the market. Adding references to prudence and knowledge reduces the relevance of the market value so defined, especially when a valuation is done for transaction purposes.
The conclusion would therefore be that the conditions about prudence and knowledgeability should not be included in the definition. The valuer should look at the current market as it is and should not have to evaluate whether the actors in this market are rational or not, given a certain interpretation of rationality. It should also be remembered that the market value definition refers to the most probable price, and if there now and then are (especially) stupid actors on the market – paying too much or selling to cheap compared to other transactions at the same time – those prices would simply not be rational to expect and should therefore not be given great weight when the market value is estimated. This means that the valuer might need to evaluate what lies behind certain transactions with deviating prices, but there is no need to evaluate whether the actors on the market in general are acting prudently or knowledgably.
2.7 Problem 4: Should the Definition Include a Reference to Willing Seller and Willing Buyer?
The interpretation of the condition about willing seller can be very important – and problematic. The alternative to including this condition is to define market value explicitly as the most probable price if a property is put on the market. In such an interpretation, it is completely irrelevant whether this is a price that the current owner would be willing to sell the property for.
If the condition about willing seller is taken seriously, the following situation could occur. Assume that the maximum price anyone is willing to pay for a property is 100, and that there are several actors who are willing to pay 100. None of the current owners are, however, willing to sell at that price as they think it is too low and that prices soon will increase. There are therefore no transactions on the market. If the condition about willing seller is not included in the definition, the conclusion would be that the market value is 100. If the condition of willing seller is included in the definition, the conclusion should be that there is no market value ‐ as there is no price that buyers and sellers could agree on.
IVSC (2019
