Market Value And Forced Sale Value – In the real estate business, there are numerous concepts that must be thoroughly understood. Two of them are market value and forced sale value. Proper understanding of these concepts will guide one during negotiation about a particular property whether you are a buyer or a seller.
There are usually contradictions when it comes to the actual definition of each of these terms. This is due to their similarity. However, they are entirely different.
You will find understanding of these two concepts helpful if you work as an auctioneer. As you know, your job is to sell to the highest bidder. Hence, it is important for you to understand them so as to stay profitable in your business.
In this article, we will explore the differences between market Value and forced sale value. We will also elaborate on the importance of each so as to ease their application and understanding for you.
Differences Between Market Value And Forced Sales Value
Forced Sale Value is the estimated amount of money that a business will sell off each of her asset due to numerous reasons. A major reason why businesses do this is because they are short of capitals. In other words, forced sales value is usually less than the actual amount that the business will normally cost (the market value). This is why Forced Sale Value is usually about 70% of the market value.
Market Value is the estimated amount of money that a business will normally cost if it were to be sold off. In other words, it is the estimated price by which the seller will sell without any compulsion. It is usually about 30% greater than the forced sale value.
Forced Sale Value tends to make profit for the buyer, leaving the seller in loss while market value put both parties in profit.
Forced Sale Value can also be referred to as Forced Liquidation and it is usually consider as the last resort for any business. Unlike market value, forced sale value is known not to meet all the necessary criteria for a transaction.
Properties to be sold with forced sale value are usually not advertised publicly and hence, they are sold off quickly while those to be sold with market value are normally advertised publicly and are sold at a much longer time
Importance of Market Value
Market value helps to clear the ambiguity that is usually associated with the price of an asset in the market place. In the market, buyers are always willing to buy low while sellers are always willing to sell more. Hence, market value helps to show the actual value of the property. With a market value, the buyer has the option of buying at the market value while the seller has the option of selling more or less of the market value.
Market Value is also known as Market Capitalization and it is usually calculated by multiplying the current price of the asset with the number of outstanding units. Note that, market value can also take into consideration value of intangibles and the future value of some of the assets. In essence, market price is not just a price but the truth underlying the asset and not only the perceived value.
Importance of Forced Sales Value
Even though forced sales value tends to be a loss for the business, there are some instances in which it is advantageous. One of them is when the business is seriously in need of capital and need to raise it in the shortest time possible. In such case, the business can sell out each of her assets without having to repair or service them. The business that is buying the assets can either be using them or resell them at a higher price.
Therefore, forced sales value helps prevent the total collapse of a business.
Conclusion
As a real estate business owner, it is important to understand the concept of market value and forced sale value in your entrepreneurial journey. These words were coined by neoclassical economists in the nine-tenth century. The concepts were proposed because value is generally recognized to be extrinsic rather than intrinsic in the real estate industry.
However, it should be noted that there are other types of value as far as the real estate industry is concerned. They include assessed value, insurable value, investment value, public interest value and many others. Of all of them, the concept of market is the subject of most appraisal assignment. If you need more help on understanding market value and forced sale value, feel free to contact Lansar Aghaji & Co for consultation today.
For Estate Surveyors and Valuers related issues or on Valuation, you can contact us at Lansar Aghaji & Co.