The difference between market value and forced sale value is a matter of time and pressure. Market value is the assumed value that would be established in a normal sale by a seller who is not in a hurry. Forced sale value is what it would fetch if it had to be sold quickly, and it is lower. Sometimes there are two numbers in the valuation report because in Pakistan, banks consider both numbers when making their calculations.
What is the market value of property?
The market value is the amount a property is worth in an open and normal sale. Both buyers and sellers are willing, the property has been on offer for a reasonable amount of time and there is no pressure from either party. It also may be referred to as the fair market value of property or open market value. They all convey the same concept.
It is the figure valuers have in mind first when they do real estate valuation, and it is what most people mean when they ask what their property is worth.
What is forced sale value?
The forced sale value refers to the amount the property will get if it needs to be sold urgently. There will be little time to sell, few buyers and there is no opportunity to wait for the best offer. The State Bank describes it as the value that allows for price swings and reflects what could be obtained in a forced or distressed sale.
You’ll also hear distress sale value in everyday talk, which is the same as above. Liquidation value is a close relative. It is used when a business’s assets are sold off together, and it is often lower still.
An example will help!
We will try to understand this with an example, take a ground floor shop in a busy market. The valuer analyses various similar shops in the area, the rental income from the shop, and the condition of the shop to conclude that the market value of the shop would be around Rs. 40 million.
Now consider two different scenarios. In the first one, the owner of the shop lists the property for sale and shows it to multiple buyers for a couple of months. The shop gets sold at around Rs. 40 million. This is the market value.
In the second scenario, the owner defaults on his loan and the bank has to sell the shop within few weeks. Fewer people can arrange that much cash so quickly, and the ones who can know the seller has little room to wait. Offers come in around Rs. 30 million. That is the situation forced sale value tries to estimate.
The Rs. 10 million gap is the cost of speed and pressure. The shop didn’t become a worse shop. The conditions of the sale changed.
When does each one apply?
Market Value is used when there is no urgency in buying or selling a property, in valuing it for company accounts, in dividing it among family members or in determining whether an investment is worthwhile.
Forced sale value is important when selling a property that may need to be sold quickly, such as when an asset is being used as security for a bank loan, if the bank requires returns of the funds from a borrower who has defaulted on their payments, at an auction or as part of an urgent sale.
Why is forced sale value lower than market value?
The key is time, buyers and risk. A rushed sale doesn’t give the seller time to wait for the best offer. There’s less competition, and fewer are able to act quickly or carry cash. And buyers know the seller can’t easily say no, so they bid lower, especially if there is any doubt about the papers or who is in possession.
How is market value calculated?
The valuation to determine the market value of property in Pakistan is usually done by considering the sale price of similar properties sold recently in the vicinity of the property and then adjusting them based on size, age, condition and location. For rented buildings, they consider the rent it receives, and, if a building is unusual, they may calculate what it would cost to rebuild it less wear. These are the main property valuation methods in Pakistan, and valuers often use more than one. Our guide to property valuation services explains the full process.
How is forced sale value calculated?
There is no universal formula used for calculating forced sale values in Pakistan. The valuer first begins by considering the market, and then asks, what would occur if the house had to be sold quickly? They consider the number of potential buyers, the ease of sale, ownership and clearance of the property and the length of the sales window.
The main things that affect forced sale value are location, the type of property, how clear the title is, demand in the area and how little time there is to sell. This produces an approximation of the value of that property on that day, which varies from property to property.
That is why there is no standard forced sale value percentage. A shop in a busy market with clean papers will usually show a smaller gap than a factory in a remote area, because the shop is easier to sell.
Why banks in Pakistan use forced sale value
When a bank lends against the property, they want to know two things: How much the property sells for in a typical commercial transaction, and how much they might recover if the borrower defaults and the property is sold. Market value is the answer for the first question. Forced sale value for bank loans answers the second.
State Bank rules also recognize forced sale value in how banks look at the security they hold. That is why bank property valuation in Pakistan is typically done by a Pakistan Banks’ Association (PBA) approved valuer and includes both numbers.
For a borrower, it means the forced sale value can influence how comfortable a bank is with a property as security. It doesn’t change what the property is worth, and a lower forced sale value is normal.
Need a property valued for a bank?
If you’re not sure which value your bank needs, or what the report should show, talk to us at Tristar International before you order one. Tristar is one of the top valuation companies in Pakistan that prepares reports for banks, so we can tell you early which figures yours should show. Tell us about the property and what the report is for, and we’ll explain what is usually asked for. You can read more about our property valuation services for property appraisal in Pakistan, or get in touch through the contact page.
