Valuations are crucial in real estate investment, serving to establish prices for various purposes like securing lending or financial reporting. However, the perceived value of a property can vary significantly based on who is conducting the valuation and their objectives. This discrepancy underscores the importance of understanding the nuanced difference between value and worth in the realm of property assessment.

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Market Value

The market value is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

To arrive at market value, various valuation techniques can be employed, but the most important consideration is that all the variables must be supported by relevant market data.

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Valuations for secured lending and financial reporting must be based on market value, which is why it is so important that professional valuers follow the rules and guidelines when doing valuations. Their objective analysis ensures fair and reliable valuations, crucial for maintaining trust in the real estate market.

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Worth / Investment Value

In contrast to market value, investment value or worth is the subjective value of an asset to its owner or a prospective owner, considering individual investment goals and strategies.

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To ascertain investment value, investors will use their strategy and experience to determine what input variables to use in their valuation. Quantifying worth poses challenges due to subjective factors such as risk appetite and personal preferences – an investor with a higher appetite for risk will use different input variables to an investor with a low-risk profile, and therefore their view on how much the property is worth will differ.

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Importance of knowing the difference

Instances where perceived worth deviates from market value can lead to discrepancies in valuation, highlighting the importance of understanding and communicating the distinction between value and worth. Effective communication between valuers and stakeholders is vital to ensure a clear understanding of the valuation process and its outcomes, fostering trust and confidence in the valuation process, and mitigating potential disputes or misunderstandings.  

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Summary

In summary, while market value reflects the estimated value of the asset based on empirical data and conducted by an unbiased third party, investment value or worth is the subjective value of the asset to a specific individual with a unique strategy and risk profile. The key differences between value and worth underscore the importance of following professional guidelines, such as those outlined by RICS, when conducting a red book valuation.

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