Chapter 13 Flashcards
Value
- The monetary relationship between properties and those who buy, sell, or use those properties. 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. (USPAP, 2016-2017 ed.)
- The present worth of the future benefits that accrue to real property ownership.”
So value is what a property is worth, but it is not a fact. It is an opinion.
Is it possible that a property could have more than one value?
Sure, value is related to the actions and beliefs of buyers and sellers.
Value is measured in terms of monetary worth; in most cases this is dollars.
Values can and do change over time. In the second part of the definition it refers to the “present worth.”
Please note the statement in the first definition (from the Appraisal Institute) that says that value is “never a fact but always an opinion of the worth of a property…”
That’s what appraisers do. We provide opinions of value!
Price
- The amount paid in exchange for a good or commodity. Price is distinguished from value because price becomes a fact when the transaction is consummated as opposed to value, which is an estimate.
- 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. (USPAP, 2016-2017 ed.)”
Prices happen. They are the result of a bargaining process that takes place between a buyer and a seller. Lots of things can enter into the negotiation. The underlying motivations of the parties, and their negotiating skills, may result in a sale price that is too high, too low, or just right (like the “Goldilocks and the Three Bears”).
Price and Value
Price and value are not the same thing!
They might happen to coincide in certain transactions, for example, a property might be worth $200,000 and it might sell at that exact price. However, we cannot automatically assume that a price that is obtained for a property is equal to the value of the property. Price is something that happened once in a particular situation at a moment in time.
Value is a price that would tend to prevail. They are not the same thing, but there is a relationship between price and value. A pattern of prices sets a range of values. In the sales comparison approach, appraisers use sale prices of comparable properties to develop an opinion of value for the subject property.
Price – USPAP
the amount asked, offered, or paid for a property.”1
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.”2
Cost
“1. The total dollar expenditure to develop an improvement; applies to either reproduction of an identical improvement or replacement with a functional equivalent, not exchange (price).
- The amount required to create, produce, or obtain a property. Comment:Costis either a fact or an estimate of fact. (USPAP, 2016-2017 ed.) In USPAP, the term cost is used either as a historic fact or as an appraisal estimate of current future or historic reproduction or replacement cost.”
Cost is related to production. It delineates what it would cost to produce a structure brand new.
Cost has a price. It may or may not have a direct relationship to value.
Cost and Value
Cost and value are not the same!
It is possible that cost and value could possibly equal the same amount in a particular situation. However, this happens even less frequently than with price and value.
As with price and value, there can be a relationship between cost and value. When developing the cost approach, an appraiser estimates the cost of the improvements as one of the steps in the process of deriving an opinion of value. As part of this process, the appraiser must estimate depreciation, which is the difference between cost new and current value. (That will be covered in some depth in subsequent courses.)
The bottom line is - we cannot simply assume that cost is equal to value.
Cost, price, and value are three different concepts. It is possible that a property could sell at a price that would be equal to its cost and its value. But it certainly is not automatic and we need to test these hypotheses.
Cost and value are usually more closely aligned when a structure is brand new. There’s a pretty good likelihood that the total of the cost for the land and improvements, plus the builder’s overhead and profit, will equal value. After all, that’s the theory behind the cost approach to value. However… as we will find out in other courses (and also in real life), it doesn’t always work that way.
