Forced-Sale Value: a Worked Example

Market value assumes a willing seller, proper marketing and enough time. A secured lender usually has none of the three. By the time it sells, the borrower has defaulted, the asset may have stood idle, the insurance and the security guard are costing money each week, and buyers know who is selling and why. Several things push the price down at once: a shorter period on the market, a thinner pool of buyers, an asset that has lost its working context, and a seller who can offer no warranties.

The asset's nature decides how far the price falls. Land with other possible uses may hold most of its value. A machine built for one product, a building shaped for one process or a half-finished development may fetch a small part of what it cost. Book value says nothing about any of this, since it records past cost less depreciation.

The price in the first line is the difficult one, and the term itself is contested. The RICS global valuation standards say the term forced sale value must not be used, because a forced sale describes the situation in which an exchange takes place and is not a distinct basis of value. They add that any relationship between a forced-sale price and market value is coincidental. A valuer can still advise on a constraint agreed in the terms of engagement, such as a sale within a stated period. In Australia, the Property Institute's guidance, updated in 2023, also advises against the term.

For plant and equipment, the International Valuation Standards recognise liquidation value on either an orderly or a forced premise, and plant valuers commonly report on those lines. So the practical request is specific: what would this asset bring if it had to be sold within so many days, in this condition, with or without the business around it, and why is the time limited? RICS says a bare time limit with no stated reason is not a reasonable assumption, because the reason shapes the price.

A leather tannery on its own freehold site, constructed for this page like every figure in it, owes its bank US$5.0m at 9%, secured by a first mortgage over the site and a charge over the plant. A valuer reports market value to a buyer continuing the same trade with normal marketing. The bank also asks for advice on a sale within 90 days following a default and closure, with the plant shut down and the site vacant. Figures in US$m.

The land barely moves. It has other possible uses, and at 2.40 it is still above a book figure set years ago. The buildings and plant lose most, because only another tanner wants them and there are few. The 90-day price is 37% below market value, and that percentage belongs to this tannery. A plain warehouse with a dozen likely buyers might lose far less, and specialised plant on a site that must be cleared might bring less than the cost of removing it.

The credit paper shows three ratios for one loan. At 61% and 71% the bank looks comfortable. Against the sale that would actually follow a default, it would lose US$1.15m, and that assumes four months from default to settlement.

Liquidation value prices everything a stopped business owns, asset by asset and net of the costs of running the sale, and its forced version is the sum of many forced sales. Forced-sale value is the same question about one asset or one security. Lending value is different in kind: it is the bank's own figure for how much of a security's value it is prepared to lend against.

Being in a hurry does not free the seller from duties. In New Zealand a mortgagee must take reasonable care to obtain the best price reasonably obtainable under the Property Law Act 2007, and a receiver must obtain that price under section 19 of the Receiverships Act 1993. In Australia a receiver must take reasonable care to sell for not less than market value or, where there is none, the best price reasonably obtainable. In England the Court of Appeal in 2003 ([2003] EWCA Civ 1409) put the duty as reasonable care to obtain the best price reasonably obtainable at the date of sale, and left the mortgagee free to choose when to sell. So a forced sale is properly conducted but not patient, and the discount comes from the circumstances, not from carelessness.

DEFINED IN ONE PARAGRAPH → · LIQUIDATION VALUE → · THE MORTGAGEE SALE →

At approval, the figure tests the second way out. A loan whose repayment is well supported can sit above a cautious realisation estimate if the bank chooses, but the credit paper should say so plainly rather than quote market-value cover alone. Where the gap is wide, a lender can respond in several ways: repay faster than the asset wears out, take other security, ask for a guarantee, lend less, or decline. The same logic drives the discounts on stock and plant in a borrowing base.

In a workout, the gap becomes a decision. It shows what a rushed sale would cost compared with giving the business time to sell in an orderly way, and that may be the strongest argument a borrower has for support. A borrower who brings a credible sale process can often produce a better price than a receiver would, which is why a bank may agree to wait, for a defined period and with milestones.

WHAT YOUR BANK HOLDS AS SECURITY → · LVR, SECURITY AND COLLATERAL → · WHEN A LOAN GOES BAD →