Cost, Price, Value & Worth
Overview
Cost, Price, Value and Worth are words used in real estate practice that are all used interchangeably, without much thought about their relationships and stark differences, which may be harmful to value determination.
This short article aims to explain the meanings and relationships between these four words.
| Cost
Cost is the expenditure required to acquire or create an asset. | Price
Price is the amount asked, offered or paid for acquiring an asset, which may be different from the Value. |
| Value
The opinion resulting from a valuation process that is compliant with the International Valuation Standards.
It is an estimate of either the most probable monetary consideration for an interest in an asset or the economic benefits of holding an interest in an asset on a stated basis of value. The most common basis of value in real estate is Market Value
| Worth
Worth is the value of an asset to the owner, or a prospective owner given individual investment or operational objectives (may also be known as Investment Value). |
In real estate terms it is more common to find the relationship as depicted in Figure 1 whereby the replacement cost is likely to be lower than the Market Value, sales price and independent measure of worth.
Relationships
Price vs. Cost: If you purchase an apartment, then, the amount you pay to the developer for acquisition is its price, while the amount invested in the property is its cost. Usually, the price of an asset or liability would likely be higher than the cost, as it includes the profit margin.
Cost vs. Value: The cost of an individual property may be decreased as the developer benefits from economies of scale; however, the value to the individual buyer of each unit remains the same, as the utility received from the apartment remains constant.
Value vs. Price: The value of a good or service will increase with its resourcefulness, this is not necessarily reflected in price. For example, the usefulness of water is very high, but the price remains low compared to a diamond where the usefulness is fairly low, but the price remains high.
Price vs. Worth: The true worth will be reflected in the price; however, when an asset is for sale, it is often priced higher due to price being negotiable. The difference in negotiation is the difference between price and worth. If the asset does not sell, the seller will have to reconsider the worth.
Value vs. Worth: Value is an estimation of the price with an asset will sell at a given point in time it is likely to be equivalent to worth except for the fact that value assess the market worth not the individual worth. The difference in these is that a seller may have a higher or lower idea of worth than the market for a particular asset.
Disclaimer
However, this is not always the case. In many instances there are numerous reasons why the cost of a property may be higher or lower than its value. Likewise, with the price, there are situations similar with any other good or service where the price is not equal to the cost or value.
Market Value is an important measure of a real estate assets fundamental value. The calculation can be carried out through different methodologies and accounting for various different assumptions and events. The RICS define Market Value as:
“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties have each acted knowledgeably, prudently and without compulsion.”
A valuation compliant with the IVSC and RICS is recognized by many industries as a reliable source of value and can be used for financial reporting, secured lending, acquisition/disposal, etc.
Advisory Services
APS Cambodia provides fully licensed, experienced and comprehensive valuation and advisory services for real estate owners, investors and lenders, combing our specialized expertise, experience and in-depth understanding of the market to deliver industry-leading valuation reports and analysis.
The team at APS Cambodia are set up to support client will all types of real estate valuation and advisory services including (but not limited to): auditing, secured-lending, due-diligence, litigations, insurance, investment, financial reporting, transfer pricing and internal reference.
If you still have any concerns, please get in touch with our APS Valuation & Advisory Team via: daluch.chin@cbre.com or call +855 (0) 85 444 282
*All rights reserved. Whilst we have tried to ensure accuracy and completeness of the contents of this document, APS Cambodia cannot offer any undertaking or guarantee, either expressly or implicitly, including liability towards third parties, regarding how correct, complete or up to date the contents of this document are. We reserve the right to supplement this document at any time to change any information contained.