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PAST PRESS RELEASES
Cost, Price, Value & Worth
Cost, Price, Value and Worth. These terms are often used interchangeably in our everyday language. Yet, these terms have important distinctions when it comes to real estate and appraisals.
For instance, I have been on numerous appraisal inspections whereupon a homeowner has pointed out how much it cost him to have a detached workshop/storage building built. Often such a homeowner mentions this with the expectation that this cost figure directly translates to value. In fact, I once arrived at an inspection and the homeowner handed me two 8 x 14 pieces of paper with a running list of information and corresponding figures and totals. At the top of the first page he had written the price he paid for the property a few years before. Below that he had listed every single thing he had ever done to the property, with the total cost of each item. The list included everything from new carpet, to paint and supplies, to repairing broken glass and door knobs, to the cost of removing a few trees. (I'm still trying to figure out how I could add for something that wasn't there now). At the bottom of the list, on the second page, he had a grand total, and informed me that this figure should be what his house appraised for. After all, thats clearly what its worth, right? Uhhmm.
Frequently, appraisers and Realtors are asked their opinions in such ways as What do you think its worth? or Whats the value? or What price should we be at? or How much do you think it would cost to build this?. Any one of these questions may be posed by a homeowner who assumes such terms are virtually synonymous. Most homeowners will naturally evaluate a professionals response against their own predetermined figure. Hence, it is very important to distinguish this terminology.
Lets define each of these terms, and then discuss them more closely.
Cost Cost is the total dollar expenditure for labor, materials, legal and professional services, etc. This is the bottom line figure when you list all the expenses incurred and add them up. Homebuilders communicate with clients almost exclusively in terms of cost. Home improvement projects, renovations, additions, and site improvements (driveways, swimming pools, landscaping, detached buildings, etc) are considered by homeowners exclusively in terms of cost.
Price Price is the historic amount paid for something. This term is specific to negotiations between a buyer and seller. Hence, Realtors most often deal with this language. There is a list price (casually referred to as the asking price) agreed upon by the seller (and Realtor), and ultimately a sales price negotiated by the parties. As well see below, the price set may have no relation whatsoever to cost, value, or worth.
Value Value is the expected price a property should bring under a specific set of assumptions. Assumptions cover a broad span I wont take time for here, but they largely include assumptions established by lenders and government bodies. Value is the predominant language of appraisers and lenders. Value is specific to a date, technically to the moment of the appraisal inspection (after all, a house fire can change the value of a structure in just minutes). Hence, most lenders can use an appraisal only for 6-12 months. Yet, at the same type, value is a projection figure. Notice the definition its the expected price a property should bring. Lenders and buyers want to know what they could expect to sell the property for if they were to expose it to the market today. This hypothetical nature of value is what makes an appraisal (and a BPO) only a professional opinion.
Worth Worth is a totally subjective term, used almost exclusively by homeowners. This term should not be used in professional practice, because it is inherently personal. Real estate (or anything else) can have a greater or lesser worth to an individual than its cost, price, or value. More on this as we proceed to a comparative evaluation of the terms.
A Linguistic Exercise
Lets consider a realistic example. A landowner, Art Wesmart, has paid $30,000 for a lot. As a historic fact, this $30,000 figure is a price. He may have paid too much or he may have bought it at an incredible bargain, so value is in question (pending a professional appraisal by Tim Medlin, of course). If the property once was owned by his grandfather or it is located one block from his workplace, the property may be worth even more to him than he paid for it. Before long, Art decides to build a house on his new property. He subcontracts all the work himself (to the dismay of all the professional homebuilders in the area). Caught up in the glee of building a beautiful home on his prized property, Art constructs a house that is twice as big as the other homes in the area. He also installs countless quality features such as marble floors, granite countertops, elaborate tile walkways, and a commercial grade heating system. All these items are found only in neighborhoods that are superior to his location. Art also pays $40,000 to have a wonderful swimming pool with concrete decking installed on his property. A significant sum is also spent on extensive landscaping. When Art totals his expenditures, his cost is $580,000. Art is suddenly nervous, he really overspent his budget. He goes to the bank for more money, and becomes especially distraught when he finds out what a low appraised value that idiot appraiser reported to the bank. (Art seeks a second opinion, but five other appraisers surprisingly turn down the assignment after seeing the house). Art tries to sell the property himself with an asking price of $580,000 (after six Realtors declined to market it at such a price). As the property sits and financial tensions build, Art soon regrets he ever bought this miserable property. Its worth more to him now to get what he can, be done with it, and pick up the pieces. He ultimately unloads the property with the help of a Realtor for a sales price of $350,000 (still higher than most homes in the area). The new owner, Vic Timnext, is thrilled, declaring to his friends, What great value I got here, I mean, do you know how much it costs to build this kind of thing. Wow, this place is unquestionably worth more than twice the price I paid!
Oh, boy, here we go again.
In Summary
While the expanse of this one fictitious story may be exaggerated, unfortunately many homeowners do go overboard in improvements because of confusing cost, price, value, and worth. That does NOT mean that a homeowner should never install a swimming pool or detached building, or otherwise improve their home. Neglecting needed repairs can bring your property value down. Improvements can add value to the home. But a homeowner must evaluate each potential improvement to weigh cost against benefit. Consider how long you intend to stay at your property. There is hidden value, what I refer to as intrinsic value, which cannot be measured in an appraisal. Investing in a swimming pool may be totally worth it to you if your family enjoys it for a long time. Taking out trees and spending money on landscaping can make you happier with your property, and may one day generate indirect profits through quicker marketing times, or less negotiation on a higher price and terms of sale. The problem arises when a homeowner simply assumes, like the guy I mentioned with the 2 pages, that every investment translates directly to value. Be especially careful with external amenities pools, detached buildings, etc. Always consider that, unlike cost or price or worth, market value is a reflection of what the typical buyer would pay in a reasonable marketing time. Hence, an appraisal will NOT demonstrate the highest price one could obtain from a specific buyer after waiting an unlimited period of time for such a buyer to present himself. The typical buyer is, first and foremost, looking for a house in your area that meets their utility needs. The extra stuff may give your house an advantage, even increase the price, but the typical buyer may not pay you cost for the extras. Whenever financial investment is a part of your improvement strategy, be very diligent in your deliberations. Like any other investment, there are no guarantees on recapture.
Cost, Price, Value, and Worth. Understanding the difference between these often intermingled terms can help homeowners better communicate with appraisers and lenders, and assist Realtors in better communicating with homeowners and potential clients. Best of luck to you, and let me know how I can help.
by Tim H. Medlin, CREA
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