WHAT IS THE DIFFERENCE BETWEEN INVESTMENT VALUE AND MARKET VALUE?

WHAT IS INVESTMENT VALUE AND HOW DOES IT DIFFER FROM MARKET VALUE?

INVESTMENT VALUE is a value based on an investor’s requirements, tax rate, or financing. This value is unique to investors, or the value the investor would pay for a specific property given their investment motives. Here are investment value’s common measures:

• Comparable Sales (comparison with identical properties either per square foot or per unit basis)
• Gross Rent Multiplier or GRM (multiplying the annual gross rent of a property by the GRM which is also derived from identical properties within the same market)
• Cash on Cash Return (dividing the pro forma cash from the first year by the total initial investment)
• Direct Capitalization (capitalizing the income stream of the subject property)
• Discounted Cash Flow (calculate the capital accumulation comparison, the net present value, and the internal rate of return)

MARKET VALUE, on the other hand, refers to the value of a property and is used for loan/mortgage underwriting, and is usually determined by a property appraisal. As per the Appraisal Foundation (TAF), “market value is the most probable price a property would bring in a competitive and open market, under all conditions, requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimuli.” But, before the market value can be determined, the property’s highest and best use (HBU) must be established first. The market value can now be determined via Sales Comparison, Income, or Cost approaches once the HBU has been established.

MARKET VALUE VS. INVESTMENT VALUE

Market value is the property’s value in a market, determined through a real estate appraisal.

Investment value, based on their unique investment motives, is determined by an investor.

Mostly, market value and investment value are roughly the same but will diverge at times. Let us take note of the possibility of the investment value being higher than the market value. How can this happen? When the value to a buyer is greater than the value to a well-informed buyer. Say for example, when a firm expands through a new building just across its current location. They will be willing to pay more than their market value so they do their expansion nearby and fill the space that could possibly be filled by a competitor.

There will also be times when the investment value can be lower than the market value. Say an investor is looking for an office but he/she is specializing in multi-family real estate. For him/her, an office would have a low investment value as compared to multi-family properties. Another example is if the investor’s requirement is a return higher than the average compared to the return from the existing portfolio.

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