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"Market Value: What Does It Really Mean?

To the Editor

The article "Market Value: What Does It Really Mean?" (Summer 2108), by Michael V. Sanders, MAI, SRA, references my article "Price, Value, and Comparable Distinctions in Distressed Markets" (Spring 2012), as "noting the inherent conflict between distressed markets and conditions attributed to standard [market] value definitions." Mr. Sanders goes on to state, "Even if real estate owned and short-sale transactions in distressed markets reflect typical motivation, Steinke opines that they still reflect undue stimulus and are therefore not reflective of market value." He then asks, "[I]f distressed sales comprise all or most market activity, isn't it more realistic to accept the market as it is, rather than impose unrealistic conditions associated with a non-existent semi-perfect market?" (Page 217)

This inference, that unrealistic conditions are imposed when distinguishing distressed sales, is misleading. My article explains that one should recognize market conditions and various marketing scenarios for what they are and correlate them with the appropriate value definition and comparable selection. Various market value definitions are at times misleading and inappropriate. The market value definition should not be universally utilized, particularly in distressed markets, despite prevailing appraisal practice to the contrary.

In distressed, bifurcated, or fragmented markets, the practitioner must recognize underlying market issues in identifying the appropriate value, and use either a market value, liquidation value, or disposition value definition, as appropriate, and maintain analytic consistency in their comparable selection and reconciliation of value. (This rationale is backed by the Ratcliff and Lovell quotes cited by Mr. Sanders.)

My article's recommendations in no way promote or support an abstract analysis or imposing non-existent or unrealistic conditions. Abstract analyses are likely to occur, however, when one uses a market value definition in the appraisal of stigmatized properties. Appraisers must distinguish non-distressed properties (typically marketed by private sellers with sustained occupancy and/or maintenance, disclosures and implied or overt warranties) from repossessions (marketed on "as-is, where-is" terms without disclosures), short-sales (with uncertainties and delays from secondary bureaucratic approvals), and auctions, whenever the market makes such distinctions as evidenced by price disparities. However prevalent or probable, distressed and non-distressed properties must be distinguished by the appropriate definition of value and comparable selection, even in the unlikely event there are no sales that comport to the dictates of the market value definition. Prevalence is not the preeminent determination of market value, and the market value definition should not be universally applied, as espoused.

The article's reasoning equates prevailing pricing with market value. "Most probable pricing" may not reflect market value when prospective marketing terms or sales do not comport with the definition in its entirety, such as with undue motivation or restrictive marketing terms often associated with distressed sales. Disposition value or liquidation value definitions must be utilized, as appropriate, to recognize distinctions in submarkets and comparables so as to maintain precision and clarity. Quoting from my 2012 Armstrong/ Kahn Award-winning article:
   Disposition value recognizes a seller under compulsion to
   sell, a client-specified future exposure time, and adequate
   marketing effort, as pertains to most REO sales.
   Liquidation value stipulates to a seller under extreme
   compulsion to sell and a reduced marketing time or
   effort so as to preclude an orderly sale, such as auctions
   or short-sales which are not openly marketed. (Page 145)

Please know, market value and fair market value are synonymous terms. (Is there a definition for "unfair" market value?) The most probable and highest likely value discussion is well-worn. The related distinctions are subject to jurisdictional interpretation and rulings, as highest value definitions are used in a judicial or governmental context. Finally, the issue of "unrealistic conditions" applies to practitioners who apply a market value definition in the context of distressed or stigmatized properties where markets demonstrate related price bifurcation.

I know of no one who "impose[s] conditions of the semi-perfect market on what all would agree to be imperfect and inefficient real estate markets." (Page 218) Market value is not an amorphous concept, and appraisal professionals should not utilize it as such.

William G. Steinke, SRA

Grosse Ile, Michigan

Author's Response

I appreciate Mr. Steinke's comments on my recent article "Market Value: What Does It Really Mean?" as well as on his own award-winning 2012 article, "Price, Value, and Comparable Distinctions in Distressed Markets," which was a worthwhile contribution to the appraisal literature.

Mr. Steinke's response suggests that I disagree with the views expressed in his article. In essence his article highlighted the difficulty of generating market value appraisals during the distressed market conditions following the subprime mortgage crisis and the Great Recession. It should be noted that he wrote from the perspective of residential lending, rather than from the broader perspective of market value addressed in my article. His article provided a useful case study of macro and micro housing markets in Detroit in 2004-2011, noting that distressed sales (primarily REO and short pay transactions) occupy a distinct tier of the market and do not comport with the accepted lending definition of market value, particularly with respect to "undue stimulus," suggesting that disposition or liquidation value would be more appropriate in a market dominated by distressed sales. His article is generally critical of regulators and those in the appraisal profession who "continue to recognize alternative interpretations of market value," (Page 140) and asserts that "market value does not and should not mean prevalent pricing." (Page 147)

I do not disagree that distressed sales generally sell for lower prices than standard or traditional sales. My own experience with hedonic modeling using multiple regression typically indicates this to be true, at least where such transactions represent a significant portion (but not the entirety) of the market. Nor do I necessarily disagree with the notion that distressed sales may not conform to the accepted lending definition of market value, although the question becomes murkier when considered in the context of some other market value/fair market value definitions.

Undue stimulus seems to be the primary condition that Mr. Steinke believes disqualifies distressed sales from consideration as indicators of market value, even if the motivations of the parties are typical of the prevailing market and exposure time is reasonable. Undue stimulus, however, is not defined as part of the actual definition of market value in the Code of Federal Regulations, The Dictionary of Real Estate Appraisal, or Black's Law Dictionary. So what exactly does it mean? Undue is commonly defined as improper, unwarranted, excessive, inappropriate, or disproportionate; stimulus is something that causes a reaction, a catalyst, or incentive. We might reasonably define undue stimulus then as an influence that exceeds what is typical in the marketplace. But what happens in a market where distressed sales are typical? Many submarkets behaved like that in the aftermath of the great financial meltdown. There was not a tiered market; there was a market (even for the few traditional sales that might have occurred) that was effectively driven by distressed transactions. This was precisely the problem addressed by the 1992 report published by the Appraisal Institute Special Task Force on Value Definitions, which Mr. Steinke and I both reference in our articles.

I would strongly disagree with the contention that prevalent or prevailing pricing should be ignored in a market value appraisal. The fact that there is sometimes a disconnect between prevailing market conditions and some definitions of market value is precisely one of the important issues raised in my article. Mr. Steinke's suggestion that distressed or stigmatized properties should not be appraised using some type of market value definition may not be practical, as such definitions are mandated for most situations, whether for the lending industry, litigation, or other purposes. As someone who has often dealt with real estate damages and property value diminution (including stigmatized properties), I believe it is worth noting that such transactions, like other distressed sales, actually do take place in the market.

Mr. Steinke observes that "the most probable and highest likely value discussion is well-worn." Indeed, it is and for good reason. It has posed a dilemma for appraisers over many decades and it continues to do so. The fact that courts cannot reach a consensus on the issue (see my article's discussion of multiple definitions of value for eminent domain in Nevada) is a testament to what a vexing problem this is, even as it continues to create needless subjectivity in the valuation profession. Market value and fair market value are not synonymous terms, and my article addresses this specific terminology issue, referencing both a 1943 US Supreme Court decision as well as The Dictionary of Real Estate Appraisal, sixth edition. Notwithstanding the lack of a practical difference between the terms themselves, the definitions of these terms vary widely, creating needless subjectivity and clear conflicts among the multitude of definitions in common use.

Mr. Steinke seems to invoke Richard Ratcliff to support the opinion that a market value definition cannot be universally utilized and that prevailing prices "may not reflect market value when prospective marketing terms or sales do not comport with the definition in its entirety." Ratcliff's scholarship on this topic is clear in the four referenced articles he published during 1965-1975, where he makes two points that are important to this discussion: (1) market value is a prediction of most probable price, including a probability dimension; and (2) the standard value definition sets up an idealized and unreal market situation with arbitrary constraints that are inconsistent with the real-life marketplace. These coincide with the major differences among all the market value/fair market value definitions in common use today: (1) the value standard relative to price ("highest" versus "most probable" versus no specific standard); and (2) the conditions imposed on a hypothetical market under which a sale is presumed to occur. Ratcliff was astute enough to recognize that "the literal implications of [market value definitions] are generally ignored in actual practice, for otherwise there would be little useful appraising done." (See Richard U. Ratcliff, "A Neoteric View of the Appraisal Function," The Appraisal Journal (April 1965): 170.)

My article was not in any way a criticism of Mr. Steinke's previous work. I believe my reference to his article is an accurate statement of his opinion that distressed sales reflect undue stimulus and therefore are not reflective of market value as defined (at least for the lending industry). The fact that he and I may disagree is exactly why I felt that a fresh look at market value definitions was warranted. One thing we agree on, to quote his letter, is that "various market value definitions are at times misleading and inappropriate."

"A proliferation of Market Value definitions ... and great confusion in the marketplace" continues to be as much a problem today as when it was identified by the Appraisal Institute's Market Value Initiative White Paper in 1999. Our role in owning a critically important definition has been usurped by the courts, regulators, and others; I'm suggesting that it might be time for self-examination by our profession as to what we might be able to do about it.

Michael V. Sanders, MAI, SRA

Seal Beach, California
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Title Annotation:Letters to the Editor
Author:Steinke, William G.
Publication:Appraisal Journal
Article Type:Letter to the editor
Date:Jan 1, 2019
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