Understanding price, cost, and value

How an appraiser looks at price, cost, and value is sometimes different than traditional definitions.

By Megan Mahn Miller, MPPA

Price, cost, and value all likely call to mind certain definitions. An appraiser’s understanding and definition of these words is very specific and may vary from a common definition.

An illustration: A person walks into an antique shop and finds the perfect item only to look at the $15 price tag and suspect the proprietor is a crazy person. The person surely will not pay $15, but would the shop owner take $10, they wonder? This is an illustration of price versus cost.

The asking price was $15, while the actual cost – the actual amount of money the person has to spend to purchase the item if the shop owner agrees to the negotiation – is $10. A price is always negotiable. Cost is a fact; it is what a person actually spends.

Another example is to think of a used car salesroom. The price the dealer would like to get is emblazoned on the windshield of each car. But you and I, and the dealer know better. I suspect the buyer will leave having paid a lower cost than the asking price.

Value, however, is an altogether different animal, and the following must be stressed: value must be justified. For appraisers, value is determined by the purpose of the valuation. That means, yes, the value of an item can change based on what the purpose of the valuation is.

Appraisal purpose affects value

Many factors can affect a value, and the purpose of an appraisal assignment is the first thing an appraiser needs to understand before beginning an appraisal. If the purpose of the appraisal is to find a value for retail replacement, that value is likely going to be much higher than if the purpose is for a liquidation value. Next, in order to justify a value, the appraiser inspects the property and considers factors affecting value. Those factors can include but aren’t limited to condition, age, desirability, provenance, use, etc.

Once an item’s characteristics are reviewed and understood, then comparable sales of similar property are investigated in the appropriate market, sales data is reviewed, anomalies are identified, and market trends are considered. All of this is important for several reasons, including:

– As sellers and buyers, we are confronted with false or unsubstantiated information.

– When you understand the concepts of price, cost, and value, you bring clarity to the conversation.

– By asking the right questions, you will not only show yourself as knowledgeable, you will also ensure that whether selling or buying you have a transparent and intelligent conversation about the transaction.

Consider the following statements:

“I was told this was worth $X.”

There are a few questions to ask about this statement. Who provided the dollar figure? When did they provide it? Was the item valued by a qualified appraiser using a specific approach to value? If the item was desirable five years ago but did not hold its value, then this statement is unfounded.

“I have seen this advertised for $X.”

As discussed earlier, a price is simply a figure, not a cost and definitely not a value. The advertised price does not mean a customer will pay it.

“I paid $X.”

There are a number of reasons why a past purchase may have lost its value. A good salesperson may have influenced the purchase, or a desire to own something immediately at any price. Additionally, changing tastes and technologies can make an object obsolete.

Buyers and sellers need to give weight to each of the proceeding statements; however, all that matters is what a person will pay at present. Fully understanding price, cost, and value can lead to smoother transactions, reduced disappointment, and appropriate expectations for all parties.

Megan Mahn Miller is an NAA member, appraiser, and owner of a consulting and appraisal business.