Title XI of FIRREA is sometimes referred to as the “Savings and Loan Bailout Bill.” This legislation accomplished a great deal with regard to lenders, appraisers, and the states in which lending and appraising takes place. Title XI also led the federal regulatory agencies to develop a market value definition to be used in the appraisal of real property that constitutes a federally related transaction by a federally regulated institution. Additionally, Fannie Mae, Freddie Mac, and others have adopted this definition of market value (with some minor variance in some cases). Following is the definition as developed by the federal regulatory agencies:

Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  1. buyer and seller are typically motivated;
  2. both parties are well informed or well advised and acting in what they consider their own best interests;
  3. a reasonable time is allowed for exposure in the open market;
  4. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

When we prepare an Appraisal Report in a market value appraisal, we must state the market value definition; meaning, we must provide it in the appraisal report, word for word, as it is found in the source. We are also required to cite the source of the definition. If you are preparing your report using a Fannie Mae form, then you will find their version of the definition already stated on one of the pages; it is not then necessary to further cite the source. In the case of a narrative report prepared without Fannie Mae forms, the appraiser is required to provide the definition himself or herself in the body of the report. You are not required to explain or elaborate on the definition of market value; you must simply provide the definition and cite its source.

Note that this particular definition of market value contains several qualifications, including the requirement that the opinion be in terms of cash or based on financing terms equivalent to cash. If the client requests that the market value be based on non-market financing or special financing terms, the report must summarize the terms of the special financing and explain its effect on the subject’s value.

Note also item #3 in the definition, referring to exposure time. When this definition of value is used in a real property appraisal assignment, the appraiser is required to develop an opinion of reasonable exposure time, and report that opinion.