Debunking myths about real estate fair value audits can help boost transparency, oversight, and investor confidence.
Fair value reporting has become a cornerstone of financial transparency in the real estate industry. For fund managers, family offices, and institutional investors, a fair value audit can be a strategic imperative. Yet, persistent myths continue to cloud understanding and lead to missteps.
Dispelling these misconceptions is essential to strengthen financial oversight and build investor confidence.
Five most common myths about fair value audits
Myth 1: Fair value is the same as market value
While “fair value” and “market value” are sometimes used interchangeably, they have distinct meanings in real estate financial reporting.
Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This is an exit price, based on the assumptions of market participants and the asset’s highest and best use — even if that differs from the current use.
Market value, in contrast, is generally described as the most probable price a property would bring in a competitive and open market, with both buyer and seller acting prudently and without undue pressure.
While the two concepts are usually closely aligned, fair value is specifically designed for financial reporting and may, in rare cases, differ from market value due to differences in assumptions or market conditions.
To enable transparency and consistency, financial reporters should always apply the fair value definition and measurement framework set out in ASC 820. This approach provides stakeholders with a clear, market-based view of asset values appropriate for financial statements and regulatory compliance.
Myth 2: Book value reflects fair value
Book value is a historical accounting figure, original cost minus depreciation, and rarely aligns with current market conditions.
A property purchased for $5 million in 2010 may now be worth $15 million due to appreciation, or just $3 million due to market decline. Fair value audits provide a present-day, independent assessment that reflects economic reality, not historical cost.
Myth 3: A fair value audit is just an appraisal
An appraisal offers a value opinion from a qualified professional. A fair value audit, however, evaluates the valuation process itself.
Auditors review the methodology, data inputs, assumptions, and compliance with accounting standards — not the value directly. This validation confirms the reported fair value is reasonable, supportable, and defensible, adding a critical layer of assurance for stakeholders.
Myth 4: Fair value audits are one-time events
Real estate values can shift due to changes in market sentiment, interest rates, borrowing costs, and occupancy. Fair value is a dynamic measure that must be reassessed regularly, often quarterly or annually, to remain reasonable.
Treating it as a one-time exercise can risk misrepresenting the financial health of an investment or portfolio of assets and can significantly undermine transparency.
Myth 5: Fair value audits are unnecessary red tape
It’s understandable why some view fair value audits as burdensome, especially for organizations with lean teams or straightforward portfolios.
However, in today’s environment of heightened investor expectations and regulatory scrutiny, these audits are far from a mere formality. They provide essential transparency, consistency, and third-party assurance that financial statements reflect current economic realities — building trust with investors, lenders, and other stakeholders.
Transparency is now a baseline expectation. Investors and regulators look for clear disclosures of valuation methods, key assumptions, audit frequency, and the rationale behind reported values. They also expect open reporting of fees, expenses, and how results are benchmarked or compared.
Documenting the impact of leverage, subscription lines, and other structural factors is increasingly required, along with consistent communication of policies and any changes over time.
These requirements go beyond compliance — they enable meaningful comparisons across funds and managers, and demonstrate a commitment to industry best practices. A fair value audit that meets these standards is a powerful tool for building investor confidence and supporting informed decision-making.
How CLA can help with fair value reporting
What may seem like red tape is, in fact, a safeguard and a competitive advantage in today’s real estate investment landscape.
CLA can bring clarity and confidence to fair value reporting. Our team supports real estate investors and fund managers with valuation methodology reviews, audit readiness strategies, and building defensible valuation processes. Let’s talk about how CLA can help you strengthen your valuation framework.