Choosing the Right Market
Monday, February 4, 2019 in Education
by Meredith Meuwly, ISA CAPP
One of the most common appraisal questions the instructors and I receive is how to choose appropriate comparables for the property being appraised. Choosing the right comparables is very important, but choosing the right market in which to choose your comparables is actually even more important.
As cited in Treasury Estate Tax Regulation §20.2031-1(b), the full definition of fair market value is "The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." (emphasis added)
The most common market for the item is where the average person can go to purchase the item. The most common market is not necessarily the market where the item would sell for the most money. Just because an item might sell for more in a retail market, does not mean that the retail market is the most common market for the item. As with anything, there are always exceptions to the rule, but in general, the most common market when determining fair market value is the auction market. Unless there is no auction market for the item, and then you look to see if there is an active market at retail. By active, I mean that consummated sales are occurring, not just asking prices listed with no actual sales.
Choosing the right market does not only apply to determining value, but also when estimating replacement cost. Where does the client most commonly shop? Does the client shop at Target or Neiman Marcus? Is the client loyal to one particular gallery even if the client could possibly pay less for the same item somewhere else? These are all questions to discuss with your client that will ultimately direct your research to the most appropriate market for replacement.
In summary, choosing the right market is the first step in choosing the right comparables for your appraisal. If you choose the wrong market for the item, then your value conclusion will likely be significantly off, thus doing a disservice to your client.