Real Estate Analysis and Commentary in Victorville

The word value is not a precise concept in real estate valuations. A descriptive word is needed to explain the function for the appraisal. The following describes several of the more common values that are sought in these assignments. 

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Market value, fair market value, ad valorem, and insurable value are distinct appraisal concepts used for different decisions: sales pricing and lending, legal/tax benchmarks, property taxation, and insurance coverage respectively. This post explains each term, compares them, and gives practical guidance for owners, buyers, appraisers, and insurers.

Quick guide and decision points

• Key considerations: transaction purpose, legal context, tax exposure, insurance needs.
• Clarifying questions to frame any valuation: Is this for a sale, loan, tax assessment, or insurance claim? What date or effective valuation moment matters?; Are there special legal or market constraints?

Definitions and how they differ

Market value

Typically used in appraisals for lending. The definition is contained in the FNMA/Fredie Mac appraisal form reports

Fair market value

Fair market value (FMV) is a legal standard similar to market value but often used in tax, estate, and litigation contexts; it assumes both parties are informed and acting without compulsion and may be interpreted by statutes or courts. FMV can be the same as market value in practice, but legal definitions and evidentiary standards can make FMV the controlling figure in disputes or tax filings.

Ad valorem

Ad valorem literally means “according to value” and describes taxes levied on property based on assessed value (e.g., property tax). Ad valorem assessments use valuation methods and statutory rules that differ from market appraisals; assessed value may lag market changes and include exemptions or caps.

Insurable value

Insurable value is the amount required to replace or repair the insured improvements (buildings and sometimes site improvements — not the land — and excludes market goodwill or land appreciation. Insurable value focuses on replacement cost and policy terms rather than what a buyer would pay for the property.

 

 

 

Comparison table

Concept	Purpose	Typical Use	Who sets it
Market value	Price in open market	Sales, mortgages	Appraiser/lender
Fair market value	Legal/tax benchmark	Taxes, estates, litigation	Courts/IRS/statute
Ad valorem	Tax base	Property taxation	Assessor/municipality
Insurable value	Replacement cost	Insurance coverage	Insurer/appraiser

Practical tips and risks

• For sellers and buyers: rely on a current market appraisal for pricing and negotiation; be aware an insurer’s replacement cost estimate will differ.
• For tax planning: understand local ad valorem rules, appeal windows, and how assessed value is calculated.
• For insurance: confirm replacement cost vs. actual cash value, policy limits, and exclusions to avoid underinsurance.
• Risk: confusing FMV with insurable value or assessed value can lead to underinsurance, tax surprises, or financing shortfalls.

Pre-Appraisal Checklist for Real Estate Valuation

Purpose: Help sellers, buyers, owners, and appraisers gather the facts that most influence market value and fair market value opinions.

• Confirm the valuation purpose and effective date — state whether the appraisal is for sale, financing, estate, tax, or insurance and the exact valuation date.
• Provide legal documents — deed, title report, easements, covenants, restrictions, and recent survey.
• Supply tax and assessment records — current assessed value, recent tax bills, and any pending appeals.
• Gather recent comparable sales — addresses, sale dates, sale prices, and MLS sheets for 3–6 similar nearby properties.
• Document income data (if applicable) — leases, rent roll, operating expenses, vacancy history, and recent capital expenditures.
• List improvements and condition — year built, major renovations (dates and costs), roof, HVAC, plumbing, electrical, and structural issues.
• Provide construction details — square footage (with source), number of units/rooms, building materials, foundation type, and energy systems.
• Compile site information — lot size, zoning, flood zone, access, utilities, and environmental reports if available.
• Show recent repair and replacement invoices — receipts for major work (roof, HVAC, foundation, seismic retrofit).
• Document unique features or defects — pools, outbuildings, historic designation, encroachments, or deferred maintenance.
• Supply marketing materials — listing history, photos, floor plans, and broker opinions of value.
• Provide insurance and prior appraisal reports — current policy declarations, prior replacement-cost estimates, and any earlier appraisals.
• Identify restrictions or special conditions — rent control, leasehold interests, eminent domain notices, or pending litigation.
• Be ready for inspection access — schedule convenient times, ensure utilities are on, and provide keys or codes.
• Ask about intended users and reliance — clarify who will rely on the appraisal (lender, buyer, court, tax authority) and any required report format.

There are basic economic principles that every valuation is based on. One of the more important one for real estate valuation is Highest and Best Use (HABU). The following is a brief discussion of this principle. In future blogs, I will discuss where to find an appraiser's finding in the Uniform Residential Appraisal Report and the various levels of analysis that an appraiser can provide. 

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Principle of Highest and Best Use (HABU)

This is a cornerstone principle and incorporates other principles such as:

 

1. Demand and supply.
2. Increasing/Decreasing returns.

 

Proper use of this principles helps to identify the single use that produces the greatest value as of a specific date for a parcel of land.

 

There are four specific tests that must be considered prior to the use conclusion. These are:

 

1. Legal Permissibility.
2. Physical Possibility.
3. Financial Feasibility.
4. Maximum Productivity (value maximization).

 

Each of these tests are applicable to the land and to the existing improvements (if any).

 

Key considerations for these tests:

 

Site size.	Shape of the site.	Availability of utilities.	Market demand.
Topography.	Access.	Development costs.	Absorption rate
Expected return	Zoning.	Political risk.	Social risk.

 

Clarifying questions to answer:

 

1. Is the property (as improved) underused?
2. Is the site larger or smaller than community standards?
3. What is the likelihood of zoning changes or variances?
4. What are the demolition and construction costs for this community?

 

Legal permissibility determines the permitted uses and maximum building size.

Physical permissibility determines the limits of what can be built on the site.

Financial feasibility measures the costs versus the returns and helps in demonstrating the feasibility of building.

Maximum productivity the final determination of the use that yields the highest value. (sales comps and income models).

 

How appraisers apply HABU:

 

1. Market analysis:
   1. Identify demand and supply.
      1. Volume of sales and active listings. Results in an absorption rate that may be used to determine the current level of supply and timing.
   2. Who is the likely buyer for the property
      1. Price levels are an important consideration. A buyer for a $1,000,000 property is going to be different than a buyer for an entry level home.
      2. The buyer for a property with an alternative use is likely to be different than a buyer for an existing use that does not require time and expense.

          

2. Site Analysis:
   1. What are the physical constraints to development?
   2. What are the levels of utilities? If they need to be brought to the site, what is the distance and level of cost? Are private utilities typical and if so, what are the costs and timing for development?
   3. What alternative uses are available for the site?
   4. What is the current path of development and the level of current development?
   5. New development in the subject’s area. Location and type are important.

       

3. Legal Review:
   1. Zoning – What are the legal uses for the site?
   2. Potential for re-zoning or variances? Examples found in the area help to identify this potential. Consideration needs to be given to the timing, political and social risk to this potential project.

       

4. Feasibility modeling: Proforma cash flows (including timing) or cost replacement analysis are used to test financial feasibility.

 

Risks, limitations and practical cautions to this analysis: 

1. Changes in zoning and granting of variances are speculative. The basis of how this was determined should be clearly delineated in the report with examples cites (if possible).
   1. A discussion regarding the political risk, social risk and time for this change should be discussed.

       

2. Timing and carrying costs estimates may change after the estimate is made.

    

3. Data gaps – a weak market (limited sales, etc.) increases the uncertainty of estimates for the project viability.

    

4. Conflict with current use. The owner may resist change, legal or community barriers may block redevelopment despite the economic logic to do so.