Market Value vs. Intrinsic Worth

Posted by admin on June 27, 2013

Market Value

Market value used in appraisals or current market analysis (CMA) is typically defined as a set of assumptions about the housing market in which the subject property may transact. It not only affects the choice of comparable data for use in the analysis, but can also affect the method used to value the property (either cost approach, sales comparison approach, or income approach). To illustrate, the market value of a public company is what investors are willing to pay for its shares, while the market value of vacant land for sale is its closing price. You can base your market valuation on the market value of comparable lands for sale: market value, therefore, is essentially an estimate of how the current buyers’ market is likely to value a property.

Intrinsic Worth

Net intrinsic worth is commonly known as the sum of a property’s assets less their liabilities, risks and uncertainties. It is calculated by evaluating the individual assets of housing or lands for sale: economic assets like merchantable and pre-merchantable timber and cropland; environmental assets such as solar rights or wind rights; improvements to residence or farm facilities; minerals and other resources. This means intrinsic worth can be defined as the net present value of all future net cash flows which are foregone by buying a piece of real estate instead of renting it in perpetuity. This also includes rent, inflation, maintenance and property taxes. Appraisers rarely calculate intrinsic worth, but a combination of consultants, such as foresters and environmentalists, can help assess intrinsic value.

Implications

Market value is fundamentally different from intrinsic worth. For example, asking prices seldom reflect the true value of lands for sale, just as the selling price of an acreage is almost never equal to its appraised value. This is because market prices reflect supply and demand. Strong investor demand can lead to overvaluation, meaning the market value is higher than the intrinsic worth. Conversely, weak demand and general investor pessimism can result in undervaluation, which means that the market value is lower than the intrinsic worth.

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