In more than 40 years in the valuation profession I’d be a rich man if I had a dollar for every time someone told me that market value is “whatever someone is willing to pay”. While it sounds simple enough, it’s not really accurate. Market value is typically defined as “the most probable price a property should bring in a competitive and open market, under conditions requisite to a fair sale, with both buyer and seller acting prudently and knowledgeably, and without undue stimulus.”
The key elements here are, “ a fair sale” and “without undue stimulus”. The “competitive and open market” is what typically encourages the “the fair sale” and the concept of market value (“without undue stimulus”) clearly stipulates that neither buyer or seller are atypically motivated. If there’s one buyer who is, for some reason motivated to pay a premium the resulting sale price may not be representative of market value. In the golf world, sales often occur at prices different than market value.
4 years ago, we at Golf Property Analysts were involved in just such a transaction. Having first been engaged to provide advisory services relating to valuation of the property, we developed an opinion of market value and shared with the client. When I told them our estimate of market value, their disappointment was evident in their long faces. I then advised them NOT to sell the property at that price. For sure, the environment at the time was considered a “seller’s market”. The client then asked us to assist in marketing the property for sale.
In the specific case of this property, there were several atypically motivated buyers that enabled us to create a bidding war that inflated the ultimate sale price to approximately double the estimated market value. First, the club in question, owned by a real estate investment firm, had a very affluent membership. The membership had a right of first refusal, enabling them to match any offer submitted. There were also small groups of members organized to acquire the club and some golf investment firms expressing interest. The economics clearly did not support the ultimate sale price to the membership. Not market value.
Not long ago, I was involved in a dispute between parties in an ownership group where we appraised the subject property, a thriving private club, based on its economics, market conditions and physical characteristics. The other appraiser in the case chose to ignore the historical economics of the club and arbitrarily estimated operating expenses well below historical costs with no foundation or support, despite recent inflation and increasing trends in operating expenses. Along with a seemingly overstated estimate of gross revenue, the difference in value estimate was quite considerable. In this instance, it has become clear to me that the appraiser, though stating he estimated market value really concluded a perceived value by the selling party in the case, based on unrealistic expectations, unsupported by either the property’s history, characteristics or competitive market. That would represent intrinsic value to the owner, not necessarily market value with the presumption of a sale.
Thus, the concept of market value is a very sensitive balance that requires a buyer and a seller not atypically motivated and presumes a sale. It’s not unusual, especially with golf properties for either aggressive buyers or distressed sellers to impact sale price in either direction. Market value is often required for lending, real estate tax assessment, eminent domain, corporate asset valuation or any number of other reasons. It’s not always as simple as “what someone’s willing to pay.
Inherent in the concept of market value is highest and best use. This is typically defined as: “The reasonably probable use of property that results in the highest value.” With golf properties, this sometimes means that an alternative use would produce a higher value than continued use as a golf or club facility, thus complicating the valuation exercise, especially if the buyer seeks to continue golf operations.
Understanding the concept of market value, its definition and the other types of value, such as investment value, value in use, liquidation value, disposition value and value in exchange is critical to understanding the value of any property in any given situation. The motivations for purchasing golf properties often vary. Some buyers are seeking income from investment, some to preserve and perpetuate the operation of a club and others to acquire a “trophy” or “toy” for a hobby. There is often considerable emotional attachment by owners to golf properties. In different economic environments, the activity of each of these types of buyers ebbs and flows with the times. What someone is willing to pay, depending on that buyer and the environment at the time may or may not constitute market value, as defined.
