The Basis of Value and the Approach

Abstract

A basis of value is the definition of value an assignment must produce: which value, defined how, and for whom. It is routinely confused with two other things. A premise of value is the assumed transactional circumstance -- open market, bulk sale, orderly liquidation, forced sale, continued use. An approach is a technique for producing a figure once basis and premise are fixed. This entry separates the three, and shows that the separation is not pedantry: each approach supports a range of bases, the ranges differ, and no approach determines the basis of the number it returns. The confusion is carried by a label. "Indicated Value by the Income Approach" names the technique and omits the one thing that fixes what the number means; the same column under different assumptions is an indication of investment value, and nothing on the page distinguishes them. In the cost approach the shorthand does worse, joining two of the three terms the discipline exists to keep apart: cost is what was spent, price is what was paid, value is an opinion about what would be paid under defined conditions. The entry sets out which bases each approach can support and under what condition -- sales comparison the most tightly bound, the income approach the widest, cost between them -- and explains why the ranges differ: an approach's range tracks how much of its input comes from observed market behavior and how much from the assignment definition. The corollary is evidentiary. The further the inputs come from the assignment rather than the market, the more the stated basis rests on the appraiser's assertion, and the more there is to contest. Subdivision analysis is treated as the sharpest case, a residual discounted cash flow whose worksheet is covered in cost figures. The same holds in the statistical setting. Fit a hedonic model on arm's-length open-market transactions and it estimates market value; fit the identical functional form on distressed sales and it estimates something else, with the same form of equation, and diagnostics and fit statistics that may look just as good. The approach did not change. The basis changed, silently, and nothing in the output records it. The worked example carries one parcel through two assignments on the same date, both answered by sales comparison from the same three comparables: a lender's instruction and an expropriation under a statute that disregards the effect of the scheme on value. The scheme-free figure is lower by $58,000; the lender's figure is 12 percent above it, and no arithmetic error, hidden adjustment or change of approach or premise separates them.