In the Philippines these days, the FMV or Fair Market Value is fast becoming a catch phrase together with the SALN – that ubiquitous document supposed to be filled up by government officials on a yearly basis.
Why, in fact just yesterday, my barber gives an in depth colloquy on the meaning of the FMV in relation to the CJ Corona affair – while cutting my hair! And alas, he spoke with an authority of one who is regularly glued to the TV channels every 2 o’clock in the afternoon watching the impeachment trial!
But really, what is a Fair Market Value? Is it the acquisition cost? Is it the zonal value of the BIR? Is it the schedule of market values given by the assessor’s office for the computation of the yearly real property tax? Or can it just be any value estimated by the owner of the property based on the so-called comparables, and what not?
To understand the concept of an FMV, one has to refer to the so-called International Valuation Standards or IVS which was adopted by the Philippines into the so-called Philippine Valuation Standards (PVS) recently. This is sort of a “Bible” for appraisers, or valuers, if you may – as it is styled in the PVS.
You see, the IVS – or as I said earlier, the PVS in the Philippines – was crafted by the London based International Valuation Standards Council (IVSC) to set the global standard for valuation. This was adopted by many countries in the world, especially in Europe. And since the Philippines do not live in a vacuum so to speak, we have also adopted these standards as our basis in making real property valuations in the Philippines.
FMV, IVS, PVS, IVSC… whew!
Before we drown on a deluge of foreign sounding acronyms, what is a Fair Market Value, again?
As it turns out, the PVS does not recommend the use of the word Fair Market Value anymore – but just simply “Market Value”. This is because to add an adjective of “Fair” before the “Market Value” is an oxymoron of sorts!
After all, the concept of a “market” implies the ability of buyers and sellers to carry on their activities without restriction, which implies fairness already – and to further qualify the word “market” with “fair” would be a bit of an overkill, is it not?
All of this harks back to that old reliable principle in economics –the supply and demand (which we will not tackle here now by the way – as it needs an entire article of its own!) – which requires an unrestricted open market economy by definition.
Why, to be precise even the ordinarily used words such as price and cost have special meanings, totally distinct from the word value!
According to the PVS, “price is the amount that has been asked, offered, or paid for an item”, while cost is the amount of money required to create or produce a commodity, good, or service. Sort of the former is the amount you get for your house, while the latter is the amount you pay in building it.
Therefore, the price is actually the acquisition cost of a real property, right?
What’s that again?
In the Philippine Valuation Standards, the term market value has a precise meaning for us real estate appraisers. It is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
A bit too much to handle? Indeed! But let’s try to dissect this definition into easy to understand parts!
First of all, let me clarify that the market value refers to valuation of property in this case (of course, it could also be applied to that other class of property called personal property) – actually real property – and its value is the result of the factors of utility, scarcity, desire, and purchasing power. These four stooges, by the way, are the so-called factors that create value in any product or service.
So let’s start with the term “ …the estimated amount…”.
It simply means that the market value is an estimate of the most probable price in terms of money (usually local currency) – repeat estimate – on a specific date of valuation in line with the other definition of the market value. Important! The estimate must be consistent with the highest and best use (HABU… oops another term again, but I explained this before in another blog here! N.B. Here’s a link to that earlier blog on the HABU) of the real property in question.
What about “ … the property should exchange…”? Well, it means again, and as mentioned above – that the value is an estimated amount of a theoretical exchange of ownership – rather than a predetermined amount or actual sales price. It is the price at which the market expects a transaction that meets all other elements of the market value.
The phrase “ … on the date of valuation …” means that a market value is time specific as of a given date – and may vary across time depending on the vagaries of the market. In fact, it may increase or decrease depending on the law of supply and demand.
The other element of market value is willingness between a buyer and a seller. This is clear in the phrase, “… between a willing buyer and a willing seller …”. It also means that the there is no compulsion on the parties involved – but rather that the exchange is based on the realities of the current market expectation alone. If the buyer or seller is compelled to buy or sell due to forces which render the price not reflective of the market forces then it is not true market value in the real sense.
Another important thing to consider is that the actual situation of the actual property owner is not considered in the valuation of market value because the “willing seller” is hypothetical – and not a real person.
So what do “ … in an arm’s length transaction…”. mean? Of course, it means that that the buyer and seller has no special relationship, right? A price cannot be considered as truly market value if the sale is between a parent and a child.
“After proper marketing …” means that the property is exposed in the market in an appropriate manner in sufficient time – enabling it to be exposed to the attention of an adequate number of potential buyers.
And finally, what do the phrase, “wherein the parties had each acted knowledgeably, prudently, and without compulsion.” It is presumed that both parties are reasonably informed about the nature and characteristics of the property, it’s actual and potential uses and the state of the market as of the date of valuation, and acts for self-interest with that knowledge – without being forced or unduly coerced to the transaction.
Truly, it is hard to encapsulate the meaning of market value in one sentence. But clearly it is an estimate of the value of a property at a given time – under conditions of a free market – with the stakeholders under no compulsion whatsoever.
In short, it is a concept of a price/value of a real property arrived at in a perfectly competitive market structure.(a paraphrase from an article of James R. MacCrate in WordPress).
Whatever that value is – it is the market value!
That’s why the valuation of a property is properly the work of a professional – the real estate appraisers. They alone are the professionals mandated by the law (RA 9646) to give estimates of market value for real property – having the skills, the know-how and the discipline of their craft to give valuations and appraisals.
Owners could estimate the market value of their property, why not? But it could be biased. It is human nature!
Even real estate brokers should in fact refrain from giving estimates of value for obvious reasons – since their commission or professional fee is actually tied up with the value of the property itself. A high property estimate means higher commission, while a low property estimate means a quick sale!
Again, its human nature!
Banks on the other hand could be also obviously biased especially if they will appraise a property – which is intended to be mortgage to the bank itself. A clear case of a judge, jury and executioner in action.
Only a real estate appraiser – who has no connection with the property being appraised, and whose professional fee is not contingent on the final valuation amount – could do a professional, uninterested, and unbiased valuation of a property.
As they say… res ipsa loquitur (the thing speaks for itself!), and so it is with real estate appraisers, or valuers.
Res ipsa loquitur, indeed!