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
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.”
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
“I have seen this advertised for $X.”
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.”
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.