What does Liquidation Value Mean?

Short Answer

Liquidation Value assumes a severely shortened marketing time, due to the fact that the seller is under extreme pressure to sell very quickly.

Definition

“The most probable price that a specified interest in real property is likely to bring under all of the following conditions:

  1. Consummation of a sale will occur within a severely limited future marketing period specified by the client.
  2. The actual market conditions currently prevailing are those to which the appraised property interest is subject.
  3. The buyer is acting prudently and knowledgeably.
  4. The seller is under extreme compulsion to sell.
  5. The buyer is typically motivated.
  6. The buyer is acting in what he or she considers his or her best interest.
  7. A limited marketing effort and time will be allowed for the completion of a sale.
  8. Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.
  9. The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
Source:Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago:Appraisal Institute, 2010).


What it Means

Liquidation Value is commonly used in situations in which the seller is under extreme pressure to sell within a very short time-frame. This differs from Market Value primarily within the realm of time:Market Value would assume a “normal” marketing time (essentially the time it takes from list to under contract) which is based on whatever market conditions are prevalent. Liquidation Value assumes that the seller needs to sell very quickly. In many situations, this will require a discount.

Conversely, Disposition Value differs from Liquidation Value because the former assumes “compulsion to sell” while the latter assumes “extreme compulsion to sell”. Thus, Disposition Value falls in between “motivated to sell” (Market Value), and “extremely motivated to sell” (Liquidation Value).

For example, say an owner of a office condo had to sell their property to pay off a kid’s college tuition which was due in 30 days, though the prevailing marketing time was 6 months to sell this type of property in this market. This owner should seek Liquidation Value if ordering an appraisal because Market Value would not take into account the discount required to attract a buyer within this time period.

In the same example, if they had to pay it off in 3 months, and were therefore under pressure to sell, but within a slightly longer time frame, a more appropriate value to seek would be Disposition Value.

Related Topics

Refer to our Value Vault resource section for additional appraisal definitions and appraisal related topics.

 
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