It is a common misconception that a piece of real estate has a single value. This is simply not true. Determining which value is appropriate likely has the biggest impact on property value.

The Royal Institution of Chartered Surveyors’ Global Valuation Standards, specify six types of real estate value (Market, Rental, Equitable, Investment, Synergistic, and Liquidation). The Appraisal Institute (of America) has identified ten distinct, and valid, property valuation bases in common use in North America. Legislation, case law, and the purpose of the real estate assignment, result in many variations of these property valuation bases. Any conversation about valuing your property has to start therefore with an understanding of the purpose of the valuation assignment or you can end up with a conclusion which is worthless at best, or seriously misleading at worst.

Let’s discuss the two most common types of value.

Market Value (Highest and Best Use) is typically quoted and understood by many (including appraisers) to be the only type of value. It is the highest price you would get for your property on a specific date, if it was offered for sale, properly marketed, and exposed for a sufficient period of time to alert and allow all potential purchasers to submit offers. It assumes that both seller and buyer are knowledgeable of property values, that neither are under pressure to sell or buy, are typically motivated, and are each acting in their best interest. It assumes a cash purchase, or typical mortgage financing, in Canadian dollars. It also anticipates that the purchaser will be able to put the property to its “Highest and Best” use, which may for example, include redevelopment, if this will create a higher value than the existing use of the property.

But beware, Market Value is not the price you could expect to get if the purchaser (1) was an adjoining owner, (2) was undertaking a land assembly, (3) was a relative or business associate, (4) knew something that the vendor should have known but did not, (5) did not know something known to the vendor of which the purchaser should have been aware, (6) wanted a “vendor take back” mortgage, (7) intended to lease back the property to the vendor, (8) enjoyed a negotiating advantage because, for example, the vendor was in dire financial straits, … and so on.

I was recently contacted by an existing client looking to secure financing for their property located on the Halifax Peninsula. Their property was improved with an older, single story commercial building. The underlying land was worth considerably more than the building and property under its current use. After discussing the purpose of the assignment with the client and their bank, it became clear that the bank was interested in more than just the Market Value (Highest and Best Use) of the property in this instance. The bank’s goal was to determine if the income generated by the property, under its current use, was sufficient to keep the lights on and pay the existing mortgage. However, the bank also wanted to know what they could expect to sell the property for if they ended up taking possession of it and selling it on the open market. Effectively, the bank had two different goals which gave rise to two different values.

We completed a thorough analysis of the property and provided the owner, and their bank with two values (1) Market Value (Highest and Best Use), which in this case was for redevelopment of the property, and (2) Market Value (Value in Use) as it currently exists without regard to redevelopment potential. Market Value (Value in Use) is similar to Market Value (Highest and Best Use) but is based on the assumption that your property could only be utilized for its existing purpose.

Difference in Value

In this instance the difference in value was significant: $1.5 million (Market Value – Value in Use) versus $2.3 million (Market Value – Highest and Best Use). Both values were included and supported in the report, allowing the bank to make an informed decision on lending.

Nigel Turner, Vice President of our Valuation Division, can be reached at