Definition
Market value is the most probable price a property would sell for in an open and competitive market under normal conditions, where both buyer and seller are knowledgeable, acting in their own best interest, and not under undue pressure.
How Market Value Is Determined
Market value is typically established through:
- Recent comparable sales
- Income performance and prevailing cap rates
- Current supply and demand conditions
- Capital market trends and interest rates
- Appraisals prepared by licensed professionals
Example (Income-Based Market Value)
A property generates $900,000 in NOI. Comparable properties are trading at a 6% cap rate.
- Market Value = 900,000 ÷ 0.06 = $15,000,000
Market Value vs. Investment Value
Market value reflects what typical market participants would pay. Investment value reflects what a specific investor is willing to pay based on their return requirements, financing terms, or strategic objectives.
Two investors may assign different investment values to the same property, but the broader market establishes market value.
Factors That Influence Market Value
- Rent growth expectations
- Occupancy levels
- Lease duration and tenant credit
- Interest rate environment
- Local economic growth
- Capital availability
Why It Matters
- Determines purchase and sale pricing
- Impacts loan underwriting and LTV calculations
- Influences refinancing decisions
- Affects reported portfolio values
Common Pitfalls
- Relying on outdated comparables
- Confusing asking price with market value
- Ignoring shifting interest rate environments
- Overestimating future rent growth