Liquidation value is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation value is typically lower than
fair market value
The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by sever ...
. Unlike
cash or
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, certain
illiquid assets, like real estate, often require a period of several months in order to obtain their fair market value in a sale, and will generally sell for a significantly lower price if a sale is forced to occur in a shorter time period. The liquidation value may be either the result of a ''forced liquidation'' or an ''orderly liquidation''. Either value assumes that the sale is consummated by a seller who is compelled to sell and assumes an exposure period which is less than market normal.
The most common definition used by real estate appraisers is as follows
[Dictionary of Real Estate Appraisal, 4th ed., ]Appraisal Institute
The Appraisal Institute (AI), headquartered in Chicago, Illinois, is an international association of professional real estate appraisers. It was founded in January 1991 when the American Institute of Real Estate Appraisers (AIREA) and the Society ...
, 2002
The most probable price that a specified interest in real property is
likely to bring under all of the following conditions:
* Consummation of a sale will occur within a severely limited future marketing period specified by the client.
* The actual market conditions currently prevailing are those to which the appraised property interest is subject.
* The buyer is acting prudently and knowledgeably.
* The seller is under extreme compulsion to sell.
* The buyer is typically motivated.
* The buyer is acting in what he or she considers his or her best interest.
* A limited
marketing effort and time will be allowed for the completion of a sale.
* Payment will be made in cash in
U.S. dollars or in terms of financial arrangements comparable thereto.
* 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.
Note that this definition differs from the most commonly used definitions of market value or fair market value.
References
Real estate valuation
Valuation (finance)
Corporate liquidations