The Trouble With “Market Value Assessment”
Appraisers, assessors, and tax experts all throw around the expression “Market Value” as though it was some clearly defined metric, like speed or interest rates. Unfortunately it is nothing of the sort. It is one of those things that seems straightforward, until you start digging.
Since Market Value is often used in a legal context, along with current value or actual value, it would be easy to assume that it is clearly defined. A closer look will show how murky this subject is.
In Ontario’s Assessment Act, the term current value has a legal definition – no doubt lawyers were involved in drafting it! It should be razor sharp, subject to no debate. Here is the definition – ““current value” means, in relation to land, the amount of money the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer”
Now, some of those words are legal terms that would send many to a legal dictionary (or to Google or Bing) – fee simple, unencumbered, arm’s length. But the last part of the definition – “by a willing seller to a willing buyer” – that is simple enough. Isn’t it?
Years ago, when I was a new employee at the tax assessor’s office, we held open houses, where taxpayers with concerns about their newly released assessments could sit down with an assessor and ask questions or plead their case. One such taxpayer told a senior assessor “if you think my house is worth this much, I will sell it to you right now!” Much to the surprise of the taxpayer, the assessor promptly pulled out his check book.
My father on the other hand would be unlikely to sell his home for twice what any appraiser would say it is worth. He has lived there for decades, raised a family there, and to him the property has a value well beyond money.
It might seem that these are silly examples. We all know that when it comes to personal residences, value can be highly subjective. Emotion plays far too big of a role. The problem being – business is no different.
Much has been written on the seeming inconsistency of buyers and sellers in the stock market. Every time there is a market crash waves of analysts observe that “fundamentals remain strong.” Many stocks are described as “overpriced” for years – especially tech stocks. Some companies with multi-billion dollar valuations have a lower net income than your local chain of dry cleaners. How can this be?
Even in a market as clearly defined as a stock exchange, decisions are made based on intuition, emotion and experience. At the time of this writing, Tesla has a higher market value than vastly larger competitors (https://ycharts.com/companies/TSLA/market_cap). Why? Is it because the tremendous physical assets of General Motors, for example, are valueless? Is it because a generation who saw the rise of the iPhone and iPad doesn’t want to miss out on the next Apple, and think Tesla might be it?
The reality is a mix of both, and a million other factors, and this is the point. Understanding buyers motivations is not really possible. You can understand an individual decision, and you can spot trends, but only after the fact. Even then the causes are not usually obvious. If they were, we would all just wait for the same cause to arise, invest everything we have, and wait for the money to roll in.
When it comes to commercial and industrial real estate, the motives can be equally unclear. Cap rate studies (key in valuing leased properties) never show a perfect trend – quite the opposite. Sales comparison analysis is often focused on explaining inconsistencies between sale prices. Even the age old mantra “the best indicator of value is a recent sale of the subject property” doesn’t hold up under scrutiny. It can be true, but not always. What if the buyer is overly optimistic about the future value? To admittedly oversimplify matters - if you were valuing a GM plant and a Tesla plant – how would you adjust them? Would you hit the GM plant with a large economic obsolescence? Or would you just assume that Tesla’s advantage is purely intangible, goodwill, and wishful thinking, with no real estate component?
These are not easy questions. Beware the seemingly simple explanation. Your local assessor may be intelligent, well meaning, and honest. In fact, they probably are. That doesn’t mean they aren’t wrong.