I provided the following article to The Worthpoint Newsletter explaining the differences between Cost, Price and Value. You can see the original here.
UNDERSTANDING PRICE, COST AND VALUE – VIEW FROM AN APPRAISER’S DESK
Here is an illustration: a person walks into an antique shop and finds the perfect item only to look at the price tag and suspect the proprietor is a crazy person. That person will surely not pay $15. Would the shop owner take $10? This is an illustration of price versus cost. The asking price was $15, the actual cost, 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.
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 is an altogether different animal. I must stress the following: value must be justified. For appraisers, value is determined by the purpose of the valuation. Come again? Value can change based on what the purpose of the valuation is? Yes, yes it can. 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.
In order to justify a value, the appraiser inspects the property and considers factors affecting value, such as: condition, age, desirability, provenance, use, etc. Once the characteristics of a particular item are reviewed and understood, then comparable sales of similar property are investigated in the appropriate market, sales data reviewed, anomalies identified, and market trends considered.
This process is important for the following reasons:
- 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 $X.”
Questions I would ask about this statement: By whom? When? If it is an item that was very desirable five years ago, but did not hold its value – this statement is unfounded. Was the item valued at “$X” by a qualified appraiser using a specific approach to value?
“I have seen this advertised for $X.”
As discussed earlier, someone can ask for a price of whatever they want. That does not mean a customer will pay the advertised price.
“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 drove the sale. Additionally, changing tastes and technology can make an object obsolete.
As buyers and sellers, there needs to be weight given to each of the preceding 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 appraiser and owner of the consulting and appraisal service, Mahn Miller Collective Inc. which specializes in Rock ‘n’ Roll and Hollywood memorabilia.