Market Value
December 2004
The focal point of all property appraisals that are completed for tax purposes is market value. When estimating this value, the assessor is required by law to consider and give weight to every element and market factor that exists. This requirement means that the assessor must review the utility, scarcity, and desirability of properties in regards to the basic principles of value that have evolved through the teaching of applied economics.
What is market value?
Minnesota's statutory definition describes it as the usual selling price at the time of assessment. A more detailed definition developed by the International Association of Assessing Officers defines market value as the most probable price expressed in terms of money that a property would bring if exposed for sale in the open market in an arm's length transaction between a willing seller and a willing buyer both of whom are knowledgeable concerning all the uses to which the property is adapted and for which it is capable of being used. An arm's length transaction is a sale between two unrelated parties both seeking to maximize their position from the transaction.
What causes the market value of properties to change?
The amount of money paid in terms of price or cost establishes market trends that ultimately affect the value of properties. Price and cost changes regularly occur because of adjustments in supply and demand. For example, if more people want to buy or have a new home constructed (i.e. demand) than there are people to sell or build it (i.e. supply), the price or cost increases. On the other hand, if more people want to sell or build it, there would be more supply than demand, and the price or cost would decrease. That being said, market value changes are attributable to what buyers and sellers feel properties are worth in light of prevailing market conditions and activities (i.e. balanced market, buyer's market, or seller's market).
Are the terms value, price, and cost synonymous?
The answer is sometimes! Value is the monetary worth of something. It is the present worth of future benefits arising out of ownership to typical users. Cost is the amount of money paid for the use of a service or for the ownership of property, and price is the amount of money paid, asked, or offered where a sale is contemplated. In real estate valuation, these terms occasionally have similar as well as different meanings, resulting in some confusion. Case in point, the price of a property may be at, above, or below its cost. This price may be justified or not, while value is usually considered to be a properly justified price based upon the analysis of additional market evidence (i.e. cost data, sale prices, and/or income information).
What are some of the factors that contribute to changes in price and cost?
It is generally unclear to many buyers what factors cause adjustments to the prices and costs associated with properties. There are several forces that are considered the impetus for this change. First, location relative to zoning, neighborhood quality, roads, and transportation has a direct and immediate bearing on price and cost. Second, the property type---unimproved property based on its shape, size, and topography or improved property in terms of its architectural design, occupancy, size, quality, shape, age, and condition---also has an influence on the price or cost paid. Third, the local, state, regional, national, and global economies have an impact on financing, the stock market, energy costs, materials, land, labor, taxes, and fees. In short, a combination of all these factors along with shifting demographics and the passage of time contribute to the changes experienced in both price and cost.
How does demographics impact the marketplace?
Certain characteristics of the human population like family sizes, marital status, income levels, education, age, and attitude to name just a few have drastically changed over the past fifty years. People today have more available options and are taking advantage of them. They are frequently changing jobs and moving around. They are also exercising their consumer preferences and adopting new lifestyles. As a result, population size and distribution has changed causing old markets to expire or transform, new markets to develop and grow, levels of supply and demand to fluctuate, and the market value of most properties to be influenced in either a positive or negative manner.