Price – Cost – Value, What’s the Difference?

While the words ‘price’, ‘cost’ and ‘value’ are used interchangeably by some, ‘value’ has a specific meaning in economics that distinguishes it from the related concepts of ‘price’ and ‘cost’.

In real estate activities ‘price’ is used in a very definitive way – in the context of a fact. For example, a properties selling price is a specific number – a fact.

With respect to ‘cost’, while many use it synonymously with ‘value’, appraisal practice requires definitions that are more precise. Appraisers typically use ‘cost’ in relation to production, not exchange, and may be either an accomplished fact or an estimate. For example, development cost includes acquisition costs, actual expenditures, and sufficient profit to compensate the entrepreneur for the time and risk involved in creating a project.

For appraisers, ‘value’ is much more a product of the interaction of social, economic, environmental and governmental forces on real estate. As ‘value’ can have many different meanings depending on the circumstances, appraisers typically do not use the word by itself – but rather refer to a certain type of ‘value’. As a single word, ‘value’ is commonly referred to as the anticipated benefits to be obtained in the future. As it changes with changing social, economic, environmental and governmental forces, appraisers typically refer to ‘value’ relative to a particular point in time.

While appraisers target many different types of ‘value’ (expropriation, foreclosure, use, assessed, investment, special circumstance, etc.), ‘market value’ is the most often sought-after in the real estate appraising industry. Due to the extensive use of the term ‘market value’ in the real estate appraisal industry, a subsequent article will discuss it in more detail.

In summary, ‘price’ and ‘cost’ are used in a fairly definitive way, while ‘value’ is a far more subjective term.

We encourage feedback from our readers – with comments on this article and/or suggestions for further ones.

Write a Comment

Your email address will not be published. Required fields are marked *