In discussing appraisal techniques in classes all across the United States, three (3) particular terms are sometimes the focus. Those terms are: Cost, price and value.
In regard to these terms, let’s take a closer look using your iPhone 7 as an example:
- Cost is the “cost” to produce, manufacture or acquire. It’s reported that it costs Apple about $240 to make your iPhone 7. This is a fact, and not an opinion.
- Price is the “price” which Apple sells (and someone pays for) a new iPhone 7. An iPhone 7 (128 GB) sells for about $750 today. This is a fact, and not an opinion.
- Value is typically considered the current market value for your iPhone 7, which you purchased about a week ago. What would someone pay for your used iPhone 7? This is an opinion, and not a fact.
Relatedly, we typically discuss what the difference is called if we subtract cost from price (Price – Cost), which is Profit (or loss.) It would appear Apple makes a profit of about $510 on the sale of a new iPhone 7 — minus other costs for research and development, marketing, etc.
Further, we could subtract price from value to see if you could likely make money on the resale of your iPhone (Value – Price.) Slightly used iPhone 7’s are currently selling for about $700 so that difference is about -$50. However, if you could sell your iPhone to your brother for $800, your profit would be $50.
Does value ever equal price? Yes, at the point-of-sale. The price of a new iPhone 7 at $750 is both priced at $750 and valued at $750 … and does price ever equal cost? Yes, if Apple (or anyone) was selling iPhones at no profit.
Thereafter, anyone’s cost, price and value follow property along — whether real or personal. After the initial sale from manufacture, most consider that cost, price and value all converge at the moment following transfer to a subsequent owner. Let’s take a closer look with some examples …
Here we have Owner A, Owner B and Owner C regarding this iPhone.
Once A buys a new iPhone 7, his cost is $750, price is $750 and value is $750. A year later A sells his iPhone to B for $500. A’s price is now $500, his cost remains $750 and the value is $500; B’s cost is $500, price is $500 and value is $500. Six months later, B sells his iPhone 7 to C for $400. Now B’s price is $400, cost is $500 and value is 400 while C’s cost is $400, price is $400 and value is $400.
Of course, it could work the other way; A could sell his iPhone to B for $800 and make $50. In this case, A’s cost is $750, price is $750 and value is $750 upon purchase. Then, when he sells to B, his cost is $750, price is $800 and value is $800 …
Some wonder … can value exceed price and/or cost at the time of transfer? Can a seller sell — and a buyer buy — for $750 but the buyer (or seller … or anyone) believe the subject property is valued at $900? The short answer is, “yes,” someone can believe this property is worth $900, but may lack evidence (at that very moment) of that value since it was just purchased it for $750.
For that matter, anyone could believe any subject property is “worth” any particular amount — presumably if they are proposing typical conditions for that valuation. For example, we wrote about the courts and auction values given arms-length circumstances here: https://mikebrandlyauctioneer.wordpress.com/2015/09/07/does-an-auction-price-equal-market-value/
Of course, there are many types of value: insurance value, replacement value, retail value, market value, wholesale value, liquidation value, salvage value, book value … the list goes on. However, most importantly, cost and price are facts and value is an opinion.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.