September 28, 2020

Cost, Price and Value: What is the Difference, and Why do we Care?

By Darya White, Senior, Advisory Services

Cost, Price and Value: What is the Difference, and Why do we Care? Valuation

What is the difference between the cost, price, and value of an asset?

These terms often get thrown around loosely during negotiations.

My goal here is to provide one way of thinking about the subject.1

Both cost and price are facts, or static numbers.

Cost is a fact reflecting what it took to build/deliver the asset to a market, or an estimate reflecting what it would take to build/deliver the asset, provided by an appraiser. An example is an appraiser estimate of the cost of property improvements necessary before the property is listed.

Price is also a fact, but one that is stated. It is the amount the asset is listed for, or the amount it has sold for. A house is listed for a specific price, and it will sell for a specific (but possibly different) price.

Value, on the other hand, is never a fact. It is always an opinion and, therefore, not fixed. Value might be an opinion by a casual observer, a stakeholder such an owner/buyer/or seller of an asset, or it might be that of a professional. In the more casual situation, it could be said that value, just like beauty, is in the eye of the beholder. In that sense, it could be guided by any set of personal circumstances or beliefs.

A professional appraiser is guided by many rules and principles of the profession, when expressing an opinion of value. He or she is required to consider all relevant facts and information, and must remain unbiased and impartial.

Thus, when contemplating a potential sale or purchase transaction, be sure to remain cautious and not accept an opinion of value from anyone other than a professional appraiser. Consider working with an appraiser specializing in the particular field of valuation.

Source

  1. The particular way of differentiating these concepts that is discussed in this article is based on definitions of the terms provided in the Uniform Standards of Professional Appraisal Practice, 2020-2021 Edition, © The Appraisal Foundation.

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