A valuation for a loan usually reports two figures. This article explains what market value and forced-sale value mean and why the lender relies on the lower one.
Two figures in one report
A valuation report prepared for a lender usually states at least two values for the same property: a market value and a forced-sale value. Borrowers are often surprised by how far apart they are, and by the fact that the lender pays more attention to the lower one.
Both figures describe the same land and buildings on the same date. They differ because they answer different questions about how the property would be sold.
What market value means
The International Valuation Standards define market value. In plain words, it is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm's-length transaction, after proper marketing, where the parties each acted knowledgeably, prudently and without compulsion.
Each part of that definition matters. The buyer and seller are unconnected, so the price is not influenced by a family or business relationship. The property has been offered to the market for long enough to reach the likely buyers. Neither party is forced to act, and both understand what is being sold.
Market value is therefore the valuer's opinion of the most probable price under normal conditions. It is not the asking price, the price the owner paid, or the cost of building the property.
What forced-sale value means
Forced-sale value is the amount the property could be expected to realise if it had to be sold under compulsion, within a period too short for proper marketing.
The assumptions change in ways that work against the seller. Fewer buyers learn of the sale, those who do know the seller is under pressure, and there is little time to negotiate or to wait for a better offer. A buyer may also discount the price for the uncertainty of buying at auction or from a lender.
Why lenders look at forced-sale value
When a lender takes a charge over property, it is planning for the case in which the loan is not repaid. In that case the lender may have to exercise its statutory power of sale, and that sale will rarely allow the time and conditions that market value assumes.
Lenders in Kenya therefore use forced-sale value to judge how much security the property provides. It gives a more cautious view of what they could recover. The amount a lender will advance against the property is a matter for the lender's own credit policy, not for the valuer.
What affects the gap between the two
The difference between market value and forced-sale value is not fixed. It depends on how easily the particular property would sell under pressure. The main factors are:
- Location and depth of demand: property in an area with many active buyers sells more readily than property in a thin or remote market.
- Property type: a standard house or plot appeals to more buyers than a specialised building such as a factory, hotel or institution.
- Title issues: an unresolved discrepancy in the title, the survey or the registered owner's details deters buyers and slows any sale.
- Condition: a building that needs repair or is incomplete narrows the pool of buyers who can act quickly.
- Time allowed: the shorter the period assumed for the sale, the greater the likely discount from market value.
Why no fixed percentage should be assumed
It is common to hear that forced-sale value is a set fraction of market value. That is not how a registered valuer should approach it. The figure is an opinion formed for the specific property, on the evidence available at the valuation date.
Two properties with the same market value can have very different forced-sale values. The valuer should explain in the report the reasons for the gap in that case, so that the lender and the borrower can see how it was reached.
What borrowers can do
A borrower cannot change the market, but can make sure the valuation is based on complete and accurate information.
- Supply complete documents at the start: a copy of the title, a recent official search, the deed plan or survey map, approved building plans and any leases.
- Resolve title discrepancies before the valuation, such as a mismatch in names, plot numbers or acreage between the title and the search.
- Ask the lender which valuers are on its panel, since many lenders accept reports only from firms they have approved.
- Make the property accessible for inspection, including all buildings and boundaries.
This article is general information, not a valuation or advice on any particular property.