Market value, price, and cost; other types of value

Value, price, and cost answer different questions

Market value is an opinion of the most probable price a property should bring in a competitive, open market under specified conditions: informed, typically motivated parties acting prudently, reasonable market exposure, and no undue pressure. It is tied to a date and a defined property interest. It is not the highest imaginable offer.

Price is the amount asked, offered, or actually paid; identify which one. A listing price expresses the seller's asking amount. A closed sale price records a particular transaction. Sale price is evidence of value, but unusual financing, concessions, urgency, or a buyer's special needs can separate it from market value.

Cost is the expenditure to acquire or create something. Historical cost records past spending. Replacement cost estimates a substitute with equivalent utility using current materials and standards; reproduction cost estimates a replica. Spending more does not ensure an equal increase in market value.

Identify the type of value

Investment value is worth to a particular investor under that investor's financing, return requirements, and other circumstances. Value in use concerns the property's usefulness in a particular use, which can differ from its value in exchange. Assessed value is the amount established for property taxation under the applicable assessment system; it is not necessarily current market value. Insurable value concerns the interest or improvements covered by insurance under the policy's valuation basis; land is generally excluded from building coverage. Liquidation value assumes a constrained sale period, often with a different level of seller motivation. Salvage value is the expected worth of recoverable components or materials when removed. Definitions and assignment conditions matter: these labels do not establish a fixed ranking of dollar amounts.

Apply the distinction

Suppose construction cost $600,000, an ordinary market transaction would most probably bring $550,000, and a specially motivated buyer pays $580,000. Cost is $600,000, estimated market value is $550,000, and sale price is $580,000. The three numbers answer different questions.

For federally related transactions, 12 U.S.C. section 3350 defines a written appraisal as an independently and impartially prepared opinion of defined value, as of a specific date, supported by relevant market information. Start any valuation question by identifying the value sought, its date, and its assumptions.