Hull & Company

Hull & Company
111 N 2nd
Rogers, AR 72756
479.273.5454 - phone
479.273.5400 - fax

What Is Market Value?

The phrase "fair market value" is an enigma in a hot commercial market like ours. Hull & Company specializes in commercial investment properties. Investment industry rules of thumb generally apply to apartments and other commercial properties, based primarily upon the NET OPERATING INCOME (NOI). CAP RATES, (Capitalization of current year NOI into an investment return ratio) are not necessarily the best way to evaluate the value of a property, especially in a market with continually escalating prices. Raw land speculation has outpaced traditional investment vehicles for many players in the Northwest Arkansas market these past several years.

Market value is truly defined by "WHAT THE MARKET WILL BEAR". Recent experience has made many investors throw out old methods and either jump in or be left out of the expanding market in Bentonville and Rogers.

Market value is the price at which a particular property, in its current condition, will sell within a reasonable time frame (90 to 180 days).

This definition contains three elements:

Particular property

Current condition

90 to 180 days

The only real measure of market value is what a particular property sells for. Period. However, unless you have a crystal ball, you might think you cannot predict how much someone will pay for the house in the future.

The appraisal of real estate is more art than science. An appraisal is only an opinion, an educated guess. Let's start learning to predict market value by analyzing each of the three elements of our definition.

The Particular Property

When you determine market value, you must always remember that you are estimating the market value of one particular property. The location, or neighborhood, of this particular parcel is the starting point for your investigation. The exact same parcel in the next city, or even on the other side of the same city, is not relevant to this determination.

For example, a commercial strip center located in Rogers, Arkansas could be worth five million dollars. But if the exact same center were located in Fort Smith (the city next door) it might be worth only $2,000,000. That's still a good price. But it's less than half the price of the Rogers property.

Although this may seem like an extreme example, property prices throughout the country fluctuate significantly from city to city and from neighborhood to neighborhood. Therefore, whenever you determine the market value of one particular parcel, you must compare it only with similar properties in the same or nearby neighborhoods.

Current Condition

Next, you must assess the current condition of the particular hproperty. The current condition determines the number of buyers who are interested in purchasing the property, which affects the amount of time the house remains for sale on the market before it is sold.

Most buyers want to buy the cheapest income property available with the ighest CAP rate. Often items such as deferred maintenance, obselescence, competition, changes in traffic patterns and strength of the leases are better indicators of long term value than the quick look at a CAP rate

A NOI of $30,000 divided by a Cap Rate of 10% yields a value of $300,000. Conversely, a $1,000,000 property with and annual NOI of $50,000 has a 5% Cap Rate, but if that million dollar property has excess land available for expansion, or has advantageous location and access to a new raod alignment, then it may have a better investment future than the 10% cap property.

About the Author

C. F. Hull is the Principal Broker and Owner of Hull & Compan, an independent Commercial Real Estate Brokerage and Consulting firm located in Bentonvile, AR. Mr. Hull has a background in development finance dating back to 1982, and has authored numerous reports, articles and research documents dealing with commercial and industrial properies throughout the Southeast US. He is Certified Commercial Investment Member (CCIM) and a member of the American Institute of Certified Planners (AICP)