It is hard to imagine more fundamental terminology in appraisal than market value and market rent. After all, usually these identify the question being answered in an appraisal, and if the question is wrong the answer cannot be right. Over the years, these two terms have been written about, modified, and debated. Still, even with a definition revision as recently as 2020, the two terms remain ambiguous and potentially confusing. The ramifications are serious. Appraisers supposedly providing opinions about the same thing end up answering different questions. The reader, client, and public in general are left confused. Public trust is diminished. This article addresses the remaining ambiguity in the terms, as currently defined, and offers suggested revisions that should clear up the confusion.
Let's be clear: definitions matter. Without clear and concise definitions, the meaning of any word can be misunderstood.
Professionals sometimes use basic industry terms without giving enough thought to their underlying meanings. Professionals sometimes, through no fault of their own, appear to be inconsistent because of definitions that are unclear or poorly crafted. The ongoing controversy over the rights to be appraised is an excellent example of the type of problems imprecise definitions can create. (1) The equally fundamental terms market value and its companion, market rent, have a similar definitional problem. Both terms involve value opinions, and assignments for both are appraisals. (2) But many fail to fully grasp how these two terms reflect hypothetical transactions that involve activity prior to and as of the effective date of value--not after the effective date of value. In other words, an opinion of market value and market rent both answer questions of "what would have" rather than "what should." Unfortunately, the conventional definitions of both terms create a gray area, which can lead to confusion.
This article considers the definitions of both market value and market rent and addresses aspects in each that are ambiguous and inconsistent. The purpose of the discussion is to clarify these concepts so they can be uniformly applied. In addition, the article will consider the options that market value and market rent provide to the appraiser. Finally, new, clearer definitions of each will be offered.
Background of Current Definitions
In 1971, William Kinnard penned the following definition of market value:
Market Value can be regarded as the price a willing buyer would pay, and a willing seller would accept, with each acting rationally on the basis of available market information, under no undue pressure or constraint, with no fraud or collusion present. It represents Value in Exchange for interests in real estate. (3) This definition covers all the necessary bases while allowing flexibility as to what is being valued--the interests in real estate. It is simple, unambiguous, and allows for adaptation to different circumstances. In contrast, the nearly contemporaneous sixth edition of The Appraisal of Real Estate (1973) did not offer a formal definition but presented three ambiguous alternatives. (4)
It was not until the 1975 publication of Real Estate Appraisal Terminology that a formal definition of market value was presented. (5) That definition has been carried forward, virtually untouched, as the current definition in The Dictionary of Real Estate Appraisal, sixth edition. (6) Although there are many current definitions of market value, most are quite similar. According to The Dictionary of Real Estate Appraisal, sixth edition,
The most widely accepted components of market value are incorporated in the following definition: 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, knowledgeably, and for self-interest, and assuming that neither is under undue duress. (7) Through time, this definition of market value has been modified--shortened in body but elongated through explanatory conditions. One notable alternative definition was introduced in the 1984 edition of Real Estate Appraisal Terminology:
The most probable price which a property will bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and assuming the price is not affected by undue duress. Implicit in this definition is the consummation of a sale as of a specified date and passing of title from seller to buyer under conditions whereby:
buyer and seller are typically motivated;
both parties are well informed or well advised, and each acting in what he or she considers to be his or her interest;
a reasonable time is allowed for exposure on the open market;
payment is made in terms of cash in U.S. Dollars or in terms of financial arrangements comparable thereto; and
the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. (8)
This definition was formalized with the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). (9) While there are alternative definitions that are applicable to different situations, (10) the discussion here will focus only on the one that incorporates "the most widely accepted components of market value."
The definition of market rent has gone through an evolution similar to that of market value. In The Appraisal of Real Estate, sixth edition (1973), the concept of "economic rent" is identified and linked to its source ("based upon current rentals being paid for comparable space"). (11) Economic rent was later distinguished from market rent and defined to mean "the amount of rent necessary to provide an adequate return on development cost." (12)
With the publication of The Dictionary of Real Estate Appraisal in 1984, the term changed to "market rent." The method of obtaining market rent was dropped from the definition of market rent in the fourth edition (2002) of The Dictionary of Real Estate Appraisal, and five "conditions" were added to the definition at that time. (13) That definition has been carried forward into the current Dictionary of Real Estate Appraisal, sixth edition (2015), where market rent...