Market Price is Determined Like the Weather

When the Day is Over, You Know!

Editor’s Note: This article first appeared in the July 1977 issue of the Real Estate News Observer.

Determining the “value” of real estate is akin to predicting US. Gross National Product for 1978. So many variables affect it (each of which demands a subjective value judgment) that appraisal is more state-of-the-art than a science.

Market Value (Legal definition used for litigation and condemnation purposes): Fair market value is the price for cash paid by a willing buyer to a willing seller after reasonable exposure to the marketplace.

Note: In fact, the court process uses “Qualified Experts” (appraisers) to render opinions as to fair market value, and does not expose it to the market.

Appraised Value: The opinion of someone (M.A.I. appraiser – institutional lender’s staff appraiser – insurance company appraiser [for replacement cost] – ‘knowledgeable’ real estate person -Aunt Fricket) as to what the property would sell for. The assumption is that this opinion is for all cash; but the data (if any) used in approaching the conclusion is based on factors relating to what really occurs in the industry, which very seldom involves all-cash transactions.

Appraisal Methods:

  1. Comparative: Find comparable properties and interpolate what prices were actually paid for them.
  2. Income: Discover or project the net income produced by the property and relate it to risk factors and current returns available in other investment vehicles.
  3. Replacement Cost (stick and stone): Find the current cost to rebuild and factor it for depreciation and obsolescence.
  4. Land Residual: Theoretically develop land and sell it at market for finished parcels. From theoretical gross sales, subtract costs of development and sales, plus reasonable profit, and what’s left is value of raw land.

The Truth: Value is what the buyer is willing to pay in whatever form negotiated to match a seller willing to take it. All opinions of those other than buyer and seller are theory, not fact, and are fraught with subjective judgment factors, which leave the result quite imprecise. Factors of timing, terms, motivation, creativity, changing laws, which affect property use, tax effects, etc., etc., each have their own effect on each completed transaction. Market price is determined like the weather is predicted for Sonoma County on July 4, 1978. When the day is over, you know.

TAX SHELTER: Keeping Uncle Sam’s money under cover so it won’t get wet (liquid).

Hunter Quistgard, S.E.C., is a semi-retired investment Realtor/exchange counselor. Licensed in 1960, and formed Hunter Associates in 1962, which managed, brokered, syndicated, and exchanged investment real estate. Hunter won the Counselor of the Year Award in 1984, and was President of S.E.C. in 1988. Motto: “A motivated owner with a knowledgeable and connected exchange counselor can manufacture a solution out of whole cloth.”

One Comment »

  1. Along with the new appraisal guidelines at Fannie Mae, Freddie Mac, and FHA, the opinions of value required by lenders will have a great effect on the fallout ratio of mortgage applications.