In certain circumstances, valuers are asked to provide valuations in constrained sale contexts. To address this issue, the Australian Property Institute (API) provided updated guidelines for valuers to address the concept of a forced sale. The guidance paper became effective on 1 July 2023.
When is market value not applicable?
Market value is defined as “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”. This definition provides the foundation for an ideal, perfect simulation of a market transaction, which allows the valuer to capture the highest achievable sale price for an asset. This is the standard basis of value. However, in certain contexts, market value is not applicable, and consideration must be given to a constrained sale context. For instance, in the context of a liquidation, impediments such as a shortened sales and marketing period and the liquidity of an asset may have an impact on the sale price that can be realised.
Examples of circumstances where market value may not be an appropriate basis of value include:
- Valuations in a liquidation or insolvency context
- A mortgagee in possession
- Divorce asset and property settlements
- Deceased estate sales
- Sales of assets for financial, health and circumstantial reasons
In these circumstances, valuers may be asked to provide a valuation on a market value basis, which assumes standard selling terms, and an alternate basis which specifies and considers any potential constraints that would impact the sale of an asset.
What constitutes a market constraint?
Market constraints should only be considered as limitations that prevent market value from being realised. Care should be taken to distinguish between market constraints and the inherent qualities of the property. For instance, the API guidance paper discusses the example of any “stigma” associated with the recent history of the property. This is deemed an inherent property characteristic, rather than a market constraint, as it would still exist even if the property was sold in a way that would allow the market value to be realised.
Examples of common constraints on achieving market value include:
- An anxious or unwilling vendor
- A shortened and/or limited marketing campaign
- A sub-optimal method being used to sell the property
Why “forced sale” value, “fire sale” value, and “distressed sale” value should not be used
The terms “forced sale” value, “fire sale” value, and “distressed sale” value are nebulous concepts, as they do not specify the constraint on achieving market value, and subsequently make it impossible for a valuer to precisely quantify. For instance, a valuer’s instructing party may specify an assumption of a three (3) week marketing campaign and an auction, as opposed to a standard six (6) month marketing campaign by expression of interest. The specificity of the constraint enables a more accurate valuation which allows the instructing party to make better, more informed decisions about the sale of an asset.
What is the relevance for insolvency practitioners and liquidators?
The standard basis of value in an insolvency, liquidation or administration context should be market value. Section 420A of the Corporations Act states that liquidators, receivers, and administrators have a duty to take reasonable care to not sell property below market value. However, s 420A(1)(b) also provides that regard should be given to what is reasonable given the circumstances, and that the property can also be sold at the best price reasonably obtainable. A robust, defensible valuation can be used to satisfy obligations under s 420A of the Act.
What are special assumptions, and how should they be used?
The API guidance note advises that best practice is for instructing parties to nominate and agree upon the special assumptions that will be factored into the valuer’s assessment. A special assumption is defined by the API as “an assumption that either assumes facts that differ from the actual facts existing at the valuation date, or that would not be made by a typical market participant in a transaction on the valuation date”. A valuer should provide advice that allows the instructing party to quantify the difference between market value and the constrained sale scenario with the special assumptions.
How should valuers be instructed in this context?
A liquidator, receiver, or administrator should engage a valuer’s opinion to allow them to make sound, defensible decisions based on the difference of the value of an asset in a constrained sale and standard sale context. The terms “forced sale”, “fire sale”, or “distressed value” should not be used, as they lack clarity. Any assessment of value without clearly defined market constraints would be imprecise, as the constraints on realising market value would not be clearly specified. The selected sales method and the nature of the marketing and selling campaign have individualised effects on the sale price that could be realised for a property. Professionals should be mindful of these issues when engaging valuers in a constrained sale context.
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