Market Value

Market value is the most probable price a property would bring if an informed buyer and seller, neither under pressure, freely agreed to the deal. It is the denominator of a market cap rate. A cap rate computed on purchase price is a going-in cap rate; one computed on current market value is what a buyer sees today.

The distinction matters after you own the property. An investor who paid $400,000 five years ago for a property now worth $500,000 with $28,892 of NOI has a 7.2% going-in cap rate and a 5.8% market cap rate. The second is the one that describes the asset now.

Market value also runs the formula backwards. Divide NOI by the cap rate that comparable properties sold at and the result is an estimate of market value, the income approach to appraisal. Because value is NOI divided by cap rate, a one-point change in the market cap rate moves value by 12 to 20%, which is why cap rate compression and expansion drive so much of property price movement.