Price | Cost | Value
The first thing to know about any of these words is that unless they are used along with some type of label, they can be worse than meaningless, they can be misleading.
The words price, cost and value are often used interchangeably. They should not be. In fact, if you were to ask the next three people you meet to define these three words, you would likely end up with nine different definitions.
That’s because these words can refer to things that are very different depending on the circumstances and parties involved. When we mix and match their use and base our own, we run the risk of producing results that may not match our desires.
As Buyers or Sellers, these words can have certain meanings, but it is important to note that Appraisers, Investors, Insurers, Lenders, the Government, different Real Estate agents and other industries all have their own distinct definitions.
Let’s look at a few examples:
- Asking or List Price is different from Sold Price.
- Replacement Cost is not the same as Reproduction Cost, or depreciated Cost, or Repair Cost
- Market Value may not be the same as Insurable Value or Taxable Value
What do all of these examples have in common? They all contain an adjective that adds specificity to the definition of the word. Without this modifier, it is impossible to be certain of exactly what is being discussed.
So who gets to decide how we define these words in Real Estate?
For our purposes we will refer to the body authorized by the US Government to provide focus, consistency and clarity to the business of valuation of Real Property.
The entity authorized by Congress as the Source of Appraisal Standards and Appraiser Qualifications is The Appraisal Foundation. The Appraisal Standards Board of The Appraisal Foundation is responsible for developing, interpreting and amending the Uniform Standards of Professional Appraisal Practice [USPAP].
According to the foreword of the 2016-2017 edition of USPAP, “USPAP represents the generally accepted and recognized standards of professional appraisal practice in the United States.”
That is where we will look for standards and definitions when discussing these terms as they relate to Residential Real Estate.
Now that we have established a credible source for our information, let start with the verbatim definitions of these words directly from the 2016 – 2017 Edition of USPAP:
PRICE: the amount asked, offered, or paid for a property.
Comment: Once stated, price is a fact, whether it is publicly disclosed or retained in private. Because of the financial capabilities, motivations, or special interests of a given buyer or seller, the price paid for a property may or may not have any relation to the value that might be ascribed to that property by others.
COST: the amount required to create, produce or obtain a property
Comment: Cost is either a fact or an estimate of fact.
VALUE: the monetary relationship between properties and those who buy, sell, or use those properties.
Comment: Value expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property at a given time in accordance with a specific definition of value. In appraisal practice, value must always be qualified - for example, market value, liquidation value, or investment value.
Well, that’s clear as mud isn’t it? In reality, there is some clarity offered in these definitions.
- PRICE and/or COST may or may not have any relation to VALUE
- PRICE is a Fact. Cost is a Fact.
- That can make it easier to begin to understand.
- There is no disputing Cost and Price, just clarifying them. (ie Closing Costs, Asking Price, Sold Price, Repair Cost etc.)
- VALUE is an economic concept. It is not a fact, it is an opinion.
- In fact, the very definition of APPRAISAL from the USPAP 2016 – 2017 standards is as follows:
- (noun) the act or process of developing an opinion of value.
- Did you notice that the type of value in the USPAP definition of Appraisal was not specified?
- More on that will follow but again, there needs to be some type of label used to define the specific value being discussed.
When you see an appraisal being done for Market Value, assuming that it was performed according to USPAP, you may not be able to locate the result on the report right away. In fact, unless the Author has included a cover page, you will have to look to the bottom of a page in the middle of the report, in a section labelled “Reconciliation” where you will find that the result is actually referred to as an “…opinion of market value, as defined…” If you look elsewhere in the Appraisal Report, you will see clarifying information including the
- Definition of the type of value being determined.
- Purpose of the Appraisal,
- Scope of Work to be performed and
The first step in any appraisal is to define the appraisal problem to be solved. (that’s appraiser-speak for what happens first). Defining the problem involves identifying the type and definition of value sought. So, any appraisal begins with a determination of the type of Value to be developed.
It is easy to assume all values are market value, and in most cases, that is true, but it is important to verify this to be the case before basing decisions or results on an un-defined value.
It is also important to be aware of these differences and to identify the proper type of report when ordering an appraisal. They are not cheap. Make sure that the type of Value returned is the type that is needed for whoever needs the report. A sample of other types of value that could be sought would include Investment Value, As-Repaired Value, Salvage Value, Liquidation Value, Assessed Value, Highest and Best Value and Insurance Value.
Most Real Estate Licenses will use a similar approach as appraisers. That is, they will provide a Comparative Market Analysis using the same Sales Comparison Approach methodology, but frequently without the detail and analysis required by a licensed appraiser and USPAP. While appraisers can be Real Estate Licensees (and vice versa…both are Regulated by the State of Florida), most licensees are not licensed Appraisers.
Importantly, A Comparative Market Analysis cannot be referred to as an appraisal.
Florida Real Estate Licensees may perform an appraisal for a fee but only when the following criteria are met:
- It must be performed in compliance with USPAP, AND
- The Transaction is not subject to any agency regulated or insured by the Federal Government. (i.e. most mortgage loans)
If a Real Estate Licensee tells you they have prepared an appraisal, unless the circumstances meet the above criteria, the next question to ask is whether they are Licensed Appraisers as well. As we are learning, words matter and a cavalier attitude toward something as fundamental as this may portend trouble down the road. Interestingly, many Licensed Appraisers also have their Real Estate Licenses.
Appraiser’s and Licensees will both use PRICE in their reports. Remember, PRICE is a fact. So List Price and Sold Price will be reviewed and used as appropriate.
We have now identified an authority and demonstrated how the words Price, Cost and Value are understood per that authority, but we still may not be singing from the same sheet of music yet.
More on Value
There are a few other commonly found uses of the word VALUE that Buyers and Sellers will likely encounter.
Types of Value associated with the County Tax Collectors office\
- Just Value (or Market Value, which per the Florida Supreme Court were declared ‘legally synonymous” (Walter v. Schuler, 176 So. 2d 81 (FL 1965),
- This is the approach to determining Market value defined by the Florida Constitution.
- It involves using the same three approaches outlined here, in accordance with guidelines set forth in Florida law, with the assistance of a computer assisted mass appraisal system.
- Assessed Value
This is the Value of a parcel before any applicable exemptions are applied, but after accounting for any caps
- Taxable Value
the value that the ad-valorem (‘according to value’) portion of the property taxes are based on after calculation and exemptions and caps and that is used in concert with the millage rates to determine a portion (or all) of a parcel’s property tax.
- NOTE: Most, but not all properties also have nonad-valorem taxes, which are calculated on things other than value such as location, frontage, etc.
- Taken together the Ad-Valorem and Non-Ad Valorem constitute the Tax Bill for a parcel.
As you can see that even within the Property Appraiser’s office, there are three distinct definitions of Value that are used. All three are governed by the Florida Constitution and are therefore the same throughout Florida.
Of note is that in this context, the Property Appraiser’s Market Valuation does NOT include typical and reasonable closing costs and therefore will generally be different (lower) than what a Real Estate Appraiser’s Fair Market Value might be.
After all, if you do not buy or sell a property this year, should you pay taxes on the costs associated with a sale or purchase?
Here is a shocker... Buyers and Sellers frequently disagree on the value of a property.
Many times, they support their opinion by citing one of the Tax Collector’s Values.
Where things get confusing is that some neighborhood have Valuations that track closely to the recent sales prices and others do not.
It is noteworthy here to point out that part of our evaluation of the value of a property includes two different methods of developing Tax Assessment Ratios. This is because depending on which side the Tax Collectors value favors, Buyers or Sellers will generally point to it and use it to make their case for an offer or counteroffer. Knowing the area is critical to understanding the relationship between the Estate Market and the Tax Collector’s various values. We discuss this with people to further their understanding and assist them in making informed decisions.
While we are on the subject of Taxes:
Many people look at the tax bill for a property for a variety of valid reasons. Keep in mind that the tax bill is driven by the taxable value.
The Taxable Value of a property will likely change upon a transfer of ownership and if the current owner has any exemptions or caps in place, the tax bill may change significantly in the year following your purchase.
A Personal Touch
Then there are the times that value might be used legitimately without a description. In these instances, perhaps a better way to consider this is to refer to this as a personal ‘What’s Important” rather than what is valued in an economic or financial context.
A few Examples:
Many properties, particularly higher end properties that were built up to late 1990’s and early 2000’s were built with sophisticated built-in wall units with a place for a television. That means that these units mostly occurred on what might be called the feature wall of a main living area (family room, great room, den etc). It was not unusual for custom made units to have installation costs upwards of $10,000 and they feature a large square opening for a television. By the mid 2000’s, many Buyers owned large rectangular televisions, sometimes, in a higher end property, those home theater units also involved Purchase Costs upwards of $10,000.
Do you see the problem here? Sellers boast the unique and custom built-in as an added value (“do you know how much that thing cost us?”) and the first thing a Buyer says when they see the space is “that needs to go!”. Its pretty clear that to this Buyer, the built-in cabinets not only have no value, they represent a Demolition and Repair Cost to remove! In this scenario, nobody is incorrect, because the Value of that particular item is unique to the individuals, it is a personal preference, not related to the property.
This is particularly true with Investors. The Investment Value to one Investor may not be the same to another Investor. For instance on may be interested in buying and holding, relying on appreciation to grow their investment, while another may be more focused on the cash flow from monthly rents.
A Seller may select an offer that promises a longer closing time frame over one that has a higher price but insists on a closing before the Seller is prepared to move out. The Seller values the closing time frame more than the price in this case. Guess what, it is an opinion. It is also ‘what’s important’ to the seller.
Pool or Formal Dining Room?
A Buyer may ask to see properties that have certain criteria and there may not be any properties with those exact criteria available. They may then decide to go ahead and make a purchase anyway, but that decision will reflect which of the criteria the Buyer feels is more important. In other words, which they value the most. Again, this is an opinion on the part of the Buyer.
These examples refer to a use of the word value that are more accurately described as ‘What’s Important’ to one side or the other.
They are Personal Value statements.
When we work with customers, we always include conversations designed to determine what’s important.
A final word about Value
Just because a thing ‘is’, does not mean that that thing automatically has value. Economists and Appraisers will tell you that the factors that determine value are
- Demand - an individual's wishes or wants - desire
- Utility - the ability of an item to satisfy a desire
- Scarcity - present or anticipated under-supply of an item relative to the Demand for it
- Transferability (also Effective Purchasing Power) - the ability of an individual or group to participate in a market and acquire an item with cash or its equivalent.
Think of the mnemonic ‘D.U.S.T.’
The interplay between those four items will determine any Value the items has.
- a 1 bathroom home is in less demand than a 2 or 3 bathroom home. (Demand)
- a large lot that can be subdivided and a new home built on the new parcel has more utility than a large parcel that cannot be subdivided. (Utility)
- a home in a neighborhood that rarely sees property come up for sale will likely be worth more than one in a neighborhood where 25% of the units sell in any given year. (Scarcity)
- a property with a defective title may be sold, but due to the risk the purchaser would likely discount the price (Transferabilty) and that property may not qualify for financing (Purchasing Power)
Perhaps a simpler way to consider how to evaluate or identify Value in layman’s terms is the following statement:
There are only two ways to create value.
You can either have more features and benefits than the competition at the same price
- or -
you have the same features and benefits at a lower price.
So What Have We Learned?
Price and Cost are both known, factual numbers. As long as the intended use of the words are understood or agreed upon, there should be no confusion.
Value however, is a bit more ethereal. It is a concept that is expressed as an opinion. According to economists and appraisers, something does not necessarily have Value just because it exists.
Value can be considered in the context of a specific property vs the broader market, OR it can be personal to individuals.
We do this every day and we find ourselves using these words interchangeably. It happens. It is easy to do.
What is really important is that when the time comes to make informed decisions, it is critical to understand the meaning and relationships of these words.
So the next time anyone asks you what the words Price or Cost or Value mean, there can only be one possible answer….
Call or contact us today to learn more