What Is Market Value in Real Estate?

Every market value question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. A city takes private land to widen a highway and pays the owner fair market value. This power is:

   • APolice power
   • BEminent domaincorrect
   • CTaxation
   • DEscheat

   Why: Eminent domain is the taking of private property for public use with just compensation, exercised through a condemnation proceeding. Escheat requires no compensation because there is no one to pay.

   Land use controls

2. 2. Market value differs from price in that market value is:

   • AThe amount actually paid
   • BSet by the county assessor
   • CAlways higher than price
   • DWhat the property should bring under typical conditionscorrect

   Why: Market value assumes a willing buyer and seller, neither under duress, with reasonable exposure to the market. Price is simply what changed hands, which may reflect an unusual motivation.

   Valuation

3. 3. A home has a market value of $500,000 and is assessed at 40% of market value. With a tax rate of $1.80 per $100 of assessed value, the annual tax is:

   • A$3,600correct
   • B$9,000
   • C$36,000
   • D$90,000

   Why: Assessed value = $500,000 × 0.40 = $200,000. $200,000 ÷ 100 = 2,000 hundreds; 2,000 × $1.80 = $3,600. Applying the rate to market value gives $9,000 and is the intended trap.

   Real estate math (calculations)

4. 4. An owner spends $40,000 installing a swimming pool, and the appraiser finds it raised market value by $18,000. Which principle explains this result?

   • AThe principle of anticipation
   • BThe principle of competition
   • CThe principle of change
   • DThe principle of contributioncorrect

   Why: "The principle of contribution" holds that a component is worth what it adds to the whole, not what it cost. The principle of change addresses market forces over time and says nothing about a single improvement paying for itself.

   Valuation

5. 5. Which condition is essential to the accepted definition of market value?

   • AThe seller must be under time pressure to complete the sale quickly
   • BBuyer and seller are typically motivated, well informed, and acting without duresscorrect
   • CThe sale must occur between family members at a negotiated figure
   • DPart of the purchase price must be paid in personal property rather than in cash or its equivalent

   Why: Market value assumes "Buyer and seller are typically motivated, well informed, and acting without duress" in an arms-length transaction. A seller under time pressure describes a forced or distress sale, which is exactly what the definition excludes.

   Valuation

6. 6. A buyer paid $420,000 for a home that cost $390,000 to build, and typical informed buyers in that market would pay about $400,000 for it. Which figure represents market value?

   • A$390,000
   • B$400,000correct
   • C$420,000
   • D$810,000

   Why: Market value is what typical informed buyers would pay, which is $400,000, while $420,000 is the price this particular buyer paid. The $390,000 construction figure is cost, and cost, price, and value routinely differ.

   Valuation

7. 7. Investment value differs from market value because investment value reflects:

   • AThe amount an insurer would pay out after a total loss of the insured structure
   • BThe figure the county places on the property for taxation
   • CThe requirements, tax position, and criteria of one particular investorcorrect
   • DThe price a typical buyer in the open market would probably pay

   Why: Investment value is subjective, resting on "The requirements, tax position, and criteria of one particular investor", so it can exceed or fall below market value. The price a typical open-market buyer would pay is the definition of market value itself.

   Valuation

8. 8. A tenant's lease includes an option to purchase at $480,000 exercisable during the lease term. Two years in, the market value reaches $560,000 and the landlord refuses to sell. The tenant's best remedy is:

   • AReformation of the option price to market value
   • BRescission of the lease and return of all rent paid
   • CSpecific performance to compel conveyance at the option pricecorrect
   • DLiquidated damages equal to the rent paid to date

   Why: Once properly exercised, the option becomes a binding purchase contract, so the tenant should seek specific performance to compel conveyance at the option price. Rescission of the lease and return of all rent paid would abandon the very bargain that has become valuable.

   Contracts