Noncompetitive Market

Yet in reality the real estate market does not conform to the criteria for a purely competitive market. For example, buyers and sellers of single-family dwellings are sufficiently few for the sale of a house to affect the offering and asking prices of nearby houses subsequently placed on the market. Since there are relatively few buyers and sellers for a given property, their decisions do affect real estate prices. This situation contrasts to that which prevails in the stock market or in the market for such commodities as wheat and eggs, where the number of buyers and sellers is so large that their individual decisions have little bearing on market price.

condo3

It is also apparent that buyers and sellers have a highly imperfect knowledge of the market. The average seller usually enters the market at infrequent periods: five or ten years or more, in the case of single family dwellings. The familiarity of these buyers and sellers with prices is handicapped by the absence of a central marketplace that reports real estate prices in terms that the average buyer and seller can understand (There are however websites such as this that provide some insight but is incomplete at best). Moreover, the technical features of real estate, its legal characteristics, construction, and current condition, among other things, call for specialized knowledge that the average buyer and seller do not possess.

In addition real estate is so highly differentiated that it is difficult for buyers and sellers to make price comparisons. Such a problem does not exist for highly standardized products, such as eggs and automobiles, whose prices may be readily compared from one unit to another. The lay person has difficulty in making price comparisons among different parcels of real estate of even the same classification.

Add to this the difficulty of entering and leaving die real estate market. A builder may not withdraw his unsold houses from the market pending a more favorable market or his products. The expensiveness of real estate and the dependence of the buyer on the availability of credit on terms he can afford limit the free entry of the buyer into the market. These factors result in a highly imperfect market that varies considerably from the competitive ideal assumed by the market value definition.

condo4

Appraisers facing this dilemma observe the market value definition by appraising property in terms of the most probable sales price. In estimating value, it is implicitly understood that the property will be offered for sale on the open market under conventional terms common to the locality. In practice, therefore, the appraiser submits an estimate of value which in his judgment will be realized if the property is offered for sale in a reasonable time under the usual market circumstances. So while the market value standard is followed, in practice it relates closely to the most probable sales price.

The Highest and Best Use

Next to market value, the concept of highest and best use is probably the most important appraisal factor. Professional appraisal organizations have defined the term as:

That reasonable and probable use that will support the highest present value, as defined, as of the effective date of the appraisal.

Alternatively, that use, from among reasonably probable and legal alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in highest land value.

It will be observed that the definition refers to land use and not buildings. For instance, a corner site occupied by a single-family dwelling might more appropriately be improved with a two-story walk-up apartment. In these circumstances the property would not be appraised as a single-family dwelling site but as a walk-up apartment site. If the site is underutilized as a single-family dwelling, the existing building would probably detract from the site value, since the building would have to be torn down for development to the highest and best use under current market conditions.

Appraised value / Market Standard Value / Pure Competition/Most Probable Sales Price

Pure Competition Assumptions Most Probable Sales Price Assumptions
1. Many buyers and sellers 1. Property offered for sale under typical market conditions
2. Standardized Product 2. Usual market imperfections
3. Reasonable knowledge of market prices  
4. Free entry to and exit from the market  

To follow this valuation principle, it should not be concluded that the highest and best use always means the present use, the use permitted under the present zoning, or the use indicated by the adjoining property. In the first instance, recall that land uses constantly undergo transition. A building appropriate 25 years ago may be inappropriate today. A study of the site must be undertaken to determine the highest and best use undo current market conditions.

While zoning controls the legal use, it is also true that zoning may change. Planning and zoning officials frequently allow changes to reflect the present urban market. Although this is a subjective determination, in estimating the highest and best use the appraiser must give an opinion on the probability of a zoning change. Likewise, because adjoining property is used as a pasture, it does not follow that the site under valuation has a similar use. Each appraisal requires a separate determination of the highest and best use. (To skip these steps, go ahead and visit TheCondoKing, a friend of mine referred this site as one of the most trustworthy appraisers of property value in the web today, and they operate locally).

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: