COST, PRICE,VALUE, AND TYPES OF VALUE: ALL YOU NEED TO KNOW
Definition of Price
Price is the amount of money paid by the buyer to the seller in exchange for any product and service. The amount charged by the seller for a product is known as its price, which includes cost and the profit margin. For example- If you buy a product for Rs 200/- then it is the price of that product.
Definition of Cost
Cost is the amount incurred on the inputs like land, labor, capital, enterprise, etc. for producing any product. It is the amount of money spent by the company in the manufacturing of a product. For example- If a company manufactures shoes, then the expenses incurred on raw materials, salaries, rent, interest, taxes, duties, etc. determine the cost of the product.
Definition of Value
Value is the usefulness of any product to a customer. In terms of money and varies from customer to customer. For example- If you are going to a gym by spending 1000 bucks a month, the output seen is worth the expense, then it is the value that you create for a gym, regarding the service being offered there. Here the worth is its value.
Property value refers to the worth of a piece of real estate based on the price that a buyer and seller agree upon. According to economic theory, the value of a property converges at the point where the forces of supply meet the forces of demand. In other words, the value of a property at a given time is determined by what the market will bear.
What buyers are willing to pay for a property depends on a number of issues, including how motivated they are is to make the purchase, their negotiating skills, and the condition of other properties in the area.
The word ‘value’ is highly subjective. The value or worth of the property depends on individual persons’ own the property depends on individual persons own perception of ‘Better life’. Persons from different economic strata in society will have different viewpoints on the fair value of an asset. Thus we can say that value is mainly a person-specific concept. But we must understand the difference between the value to the individual and value to the market
|Meaning||Price is the amount paid for acquiring any product or service.||Cost is the amount incurred in producing and maintaining something.||Value is the utility of a good or service.|
|Ascertainment||Price is ascertained from the consumer’s perspective.||Cost is ascertained from the producer’s perspective.||Value is ascertained from the user’s perspective.|
|Estimation||Through Policy||Through Fact||Through Opinion|
|Impact of variations in market||Prices of products increase or decrease.||The cost of inputs rises or falls.||Value remains unchanged.|
|Money||It can be calculated in terms of money.||It can also be calculated in monetary terms.||It is not calculated in terms of money. However, from a quantitative perspective it can be calculated in terms of money|
– Types of Value
- Theoretical value – mathematical value worked out for the property
- Economic value – is a measure of the benefit that an economic actor can gain from the property& is generally measured in terms of currency.
- Social and Cultural value– Socially factors are things that affect someone’s lifestyle. These could include wealth, religion, buying habits, education level, family size and structure, and population density.
There are several types and definitions of value sought by a real estate appraisal. Some of the most important are:
Investment value –This is the value an investor may purchase a property that may be higher or lower than a market value.
- Insurable value –is the value of real property covered by an insurance policy. Generally, it does not include the site/land value.
- Actual Cash Value/Actual Value/Cash Value:
- This is a term used in the insurance industry to describe the amount of compensation the insured would recover in the event of a loss. It considers an item’s condition and depreciation and is synonymous with replacement cost less depreciation.
- Market Value:
- Market value is defined by the International Society of Appraisers (ISA) as the most probable price that a buyer will have to pay and that the seller is most likely to receive, for an item of property within the defined marketplace at a particular point in ti There are several kinds of market value used for different types of appraisals including forced liquidation value, orderly liquidation value, salvage value, scrap value, marketable cash value, actual cash value, net value, value in use, or value in place.
- As per IVS (International valuation standard) (IVSC 2017)
- “Market value is estimated amount for which an asset should exchange on the date of valuation, between a willing buyer and a willing seller, in an arm’s length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion”
- As the valuer has to estimate the amount, he should assume hypothetical buyer and hypothetical seller both willing to transact
- Both buyer and seller must be knowledgeable.
- The market should be an open market.
- At arm’s length
- Transaction between related buyers and sellers or between close friends should not be considered.
“Estimated amount for which an asset should exchange”
- “After proper marketing”
- Minimum assumptions
- Reasons for adoption of certain basics
- The subject matter of valuation
- “Interest” in the property as the right of a person to derive benefit (Existing or future)
- Putting land/land and building to Legal and Best possible (Potential) use.
- Physical characteristics of land (Soil, size) and materials used in the building (Brick, cement, steel) are not valued but right to derive benefit (existing or future benefit) by putting the property to lawful use and highest and best use, is being valued.
“a willing seller” is neither an over-eager nor a forced seller, prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market. The willing seller is motivated to sell the property at market terms for the best price attainable in the (open) market after proper marketing, whatever that price may be. The factual circumstances of the actual property owner are not a part of this consideration because the ‘willing seller’ is a hypothetical owner.
“In an arms-length transaction…” is one between parties who do not have a particular or special relationship (for example, parent and subsidiary companies or landlord and tenant) that may make the price level uncharacteristic of the market or inflated because of an element of Special Value. The Market Value transaction is presumed to be between unrelated parties, each acting independently.
“ after proper marketing…” means that the property would be exposed to the market in the most appropriate manner to effect its disposal at the best price reasonably obtainable in accordance with the Market Value definition. The length of exposure time may vary with market conditions, but must be sufficient to allow the property to be brought to the attention of an adequate number of potential purchasers. The exposure period occurs prior to the valuation date.
“…wherein the parties had each acted knowledgeably and prudently…” presumes that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the property, its actual and potential uses, and the state of the market as of the date of valuation. Each is further presumed to act for self-interest with that knowledge, and prudently to seek the best price for their respective positions in the transaction. Prudence is assessed by referring to the market condition at the date of valuation, not with benefit of hindsight at some later date. It is not necessarily imprudent for a seller to sell property in a market with falling prices at a price that is lower than previous market levels. In such cases, as is true for other purchase and sale situations in markets with changing prices, the prudent buyer or seller will act in accordance with the best market information available at the time.
“..and without compulsion…” establishes that each party is motivated to undertake the transaction, but neither is forced on unduly coerced to complete it. Market Value is understood as the value of an asset estimated without regard to costs of sale or purchase and without offset for any associated taxes.
- Fair Market Value:
- Fair market value is defined in as, “The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”
- “Fair market value is not to be determined by a forced sale . . . nor is the fair market value of an item to be determined by a sale within a marketplace other than that in which the item would be most commonly sold to the public . . . taking into consideration the location of the item where appropriate.
- Liquidation Value:
- This is a type of market value that depends on the reason for the liquidation such as the distribution, division, sale or conversation to cash of personal property, business assets, or inventory by settlement, agreement or legal process. Liquidation values assume there is some amount of duress in making the sale. It may be based on an orderly liquidation value if a period of a few months is available to make the sale or a forced liquidation value if the sale must take place usually in under 30 days.
- Marketable Cash Value:
- This is the amount that would be netted by the seller of an estate after all costs associated with the sale such as advertising, commissions, transportation, and photography were deducted. It is used by the IRS to value items sold in an estate as opposed to property held or bequeathed which is based on fair market value.
- Net Value:
- This is a term typically used in divorce cases to indicate the market value of the marital property less any encumbrances such as liens or debt or expected selling costs that would serve to reduce the property’s market value.
- Marriage value: an additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.
- Replacement Cost: Replacement value is the cost of reproduction of a similar building with similar specifications at the current market price on the date of valuation. It is also called as Reproduction Value or Reinstatement Value.
- Replacement cost is an insurance term meaning the amount of money one might be expected to pay to replace a property that was destroyed, stolen or damaged. Replacement cost is further subdivided into replacement cost new, replacement cost new less depreciation, replacement cost used (or comparable), reproduction cost, production cost and buyer’s cost.
- Salvage Value:
- Salvage value is a type of market value and is the amount that could most probably be obtained by dividing the property into its component parts and sold separately as is.
- Scrap Value:
- This is a type of salvage value in which even the component parts have no value except for the materials from which they were made.
- Value in Use:
- This is the value of the property taking into consideration the extent to which the property contributes to the personal needs, satisfactions or requirements of the owner. It generally increases the value of the property based on it having some unique use or meaning to its present owner.
- The value in use of a property is the value or worth of that property under a specific use, which means the value of the property as it is being used at present. The value in use amount of a property may be more or less than its market value. For example, land which is located at a place that is in the path of growth for a major project and is used as a small farm will have the value in use less than the market value. Such a land’s market value will be much higher than its value in use
- Value in Place:
- This is the value of the property taking into consideration the extent to which the property contributes to the success of an enterprise. Examples might include a stove hood that might not have significant value were they not “in place” but would represent a tremendous loss should they become damaged while in place.
- Speculative value: when the property is purchased so as to sell the same at a profit after some duration, the price paid is known as Speculative value.
- Monopoly value: In a developed colony, the value of the plot goes on increasing when a number of the available plots goes on decreasing. The fancy price demanded by the vendor for the remaining plots is known as Monopoly value.
- Sentimental value: The extra price which is demanded by a vendor when he attaches certain sentimental to his property is known as a sentimental value having no relation with the market value.
- Fancy value: It is also called the Desired value. If the purchaser wants to have a property somehow since the procurement is an absolute necessity for him due to various reasons, he is prepared to pay more sums when compared with others. He attaches a special desire over the side property. The extra sum he is prepared to pay is called fancy value.
- Depreciation value: It is the reduction of value of the property due to age, deterioration, lack of maintenance, obsolescence, decay, wear and tear, etc., Depreciation value depends upon age and its future life. Present value: It is a replacement value less depreciation value.
- Insurance value: It is the value of the building for which the building is insured. Normally the building is insured of the superstructure alone (not for the foundation) – land value is excluded. Potential value: It is an inherent value that may go on increasing due to the passage of time or some other factor that will fetch more return.
- Present value (PV): It is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows
- Value of the Going Concern: The term value of the going concern refers to a value opinion that takes income from both the real estate and the associated business into account. Appraisals involving the value of a going concern are commonly used when the market values of the real estate and business are difficult to segregate, such as in appraisals of bowling alleys, funeral homes, hotels, and automobile dealerships. It is difficult to conceive of selling a hotel without selling the business along with the real estate. Some restaurants will also include non-realty components when they change hands, which means that the value indicated by the sale price of the restaurant would be greater than the underlying value of the real estate.
- Public Interest Value: Appraisers are occasionally called on to analyze non-economic uses of land. Non-economic uses include usage as public parks, endangered species habitats, or other similar uses that are not usually the highest and best use of the land. Market value may not be an appropriate type of value for these situations. Instead, what is known as public interest value is the type of value that clients want to be appraised. These terms may not be interchanged, nor should the value to the public be considered in a market value appraisal. When appraisals of public properties are prepared, it is important to find out what the intended use is and to be sure that the value opinion is not misleading. Remember that market value assumes a market. If the appraiser cannot find any sales, buyers, or sellers for a property in that use, the appraiser should be careful when using the term market value.
- Assessed Value: Assessed value is the value of real estate for taxation purposes. The assessed value can be a percentage of the market value or a ratio of cost to value. The assessed value is a direct function of the assessor’s best estimate of a property’s market value in some states, while in others it has little to do with value but is only a function of equitable taxation. An assessor’s opinion of assessed value can be converted into an opinion of market value in some states but not in others. Assessors in some states are required to estimate use-value, not market value because some large and very expensive improved properties have a great deal of value to the owner but much less value on the market.
- Use Value: To develop an estimate of use-value, an appraiser assumes the use stipulated by the client. In a use-value appraisal, the use of the property is usually not the same as the highest and best use in a market value appraisal. The use-value is often much higher than the market value would be. For example, assume that you own a factory with specialized design and equipment and ask an appraiser to determine what the factory is worth to your corporation, which has used for these special features. The use-value estimate could be the same as the market value if there is a resale market for the special features, meaning that other buyers in the market would be willing to pay for the features when they are associated with the subject real estate. The use-value opinion will be much higher than the market value if there are no buyers who will pay a premium for the features, i.e., the market value is low because no market exists. The most common way to estimate use-value is the cost approach, which allows for segregating and deducting physical depreciation.
- Book value of the immovable property:
- Book value(also known as carrying value or net asset value) is an asset’s value as recorded on a company’s balance sheet. In essence, book value is determined as the original cost paid for the asset’s acquisition, adjusted for any depreciation, amortization, or impairment attributable to the asset.
- a)The Book Value of immovable property for an individual (not maintaining accounts) will be the purchase price + stamp value + registration expenses + any legal charges paid for the transaction.
- B)The Book Value of immovable property for an individual (business), for companies (Limited Liability Partnership / Private & Public Limited Companies) will be net book value (land cost & WDV of buildings) as per the balance sheet of the company
Realizable Value: Realizable Value or Net realizable value (NRV) is the value for which an asset can be sold, minus the estimated costs of selling or discarding the asset.