In the world of real estate valuation, market value is a most prominent concept. The most widely used definition (there are other similar definitions) is found in the 7th Edition of the Real Estate Appraisal Dictionary and states: “The most widely accepted components of market value are incorporated in the following definition: The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.” Not only are there definitions using alternative language, but there are also other types of value, such as “use value”, “investment value” and “assessed value,” among others.
Most (not all) appraisal assignments are intended to identify market value, and the Uniform Standards of Professional Appraisal Practice (USPAP) requires appraisers to identify and define the type of value and whether it is based on cash or some other specifically described terms. In our engagement agreements, we are clear about the value being sought and usually have a discussion about not only the value sought, but also the intended use of the appraisal to ensure that the work being done will serve the intended purpose.
Recently, we did an appraisal of an upscale private club where the type of value sought and intended use was not accurately communicated to us, despite being clearly set forth in the engagement letter and in the appraisal report. The client, hoping to use the appraisal to justify costs incurred in improvements made to the club was ultimately seeking to justify the costs incurred, which an estimate of market value didn’t do.
Golf properties, in particular almost always cost more to develop than their resulting market value, which presumes a sale. As such, the cost approach is rarely relevant in reflecting the actions of buyers and sellers in the marketplace, especially when depreciation can only usually be estimated by using a method called market extraction, which simply measures the difference between the indications of value developed by the income and sales comparison approach and the replacement or reproduction cost of the club, plus the land value. Kind of a back door approach, that especially with newer clubs does serve to identify how much in excess of market value was invested since there’s usually not much physical deterioration and hopefully limited functional obsolescence.
The key here is that it is not the appraiser’s job to simply confirm development costs as market value and it’s critical to know why the appraisal is being done and which type of value is sought. With golf properties, for a variety of reasons, the cost approach is rarely relevant. The vast majority of golf property sales are predicated on the property’s capability to generate income, thus the income approach is typically primary. The sales comparison approach, usually employing metrics based on revenues and income is also reflective of the actions of market participants. We are sometimes required to consider sometimes develop the cost approach in litigation where somehow case law has dictated it be used. It is rarely indicative of market value, which includes the presumption of a sale. Market Value is NOT simply what it costs to build it.
