The appraisers are required to understand and be able to distinguish the differences between cost, price, and value. Where is the price, cost, and value? In identifying these three types of measuring levels of exchange rates this can cause errors in providing property valuation. Simply put, the price is the amount of money offered or paid to release or obtain an object. In short, price is the number of agreements between the buyer and seller in a transaction of goods or services.
The meaning of cost is nothing but the amount of money needed to make or create an object. While the value itself has a definition as an amount of money (if measured with money) that is worthy of an object that is not only measured by the cost of its manufacture but also seen from the usefulness, suitability, and availability of the object.
As for more details, in the SPI (Indonesian Assessment Standards), prices, costs, and values are defined as follows:
Cost
The amount of money needed to obtain or create an asset. When assets have been acquired or created, costs are a fact. Price is related to costs because the price paid for an asset is a cost to the buyer (KPUP-SPI 5.3 2013)
The estimated cost of the property can be based on the Estimated Reproductive Cost. Cost of Reproduction is the cost of creating a replica of an existing structure, applying the same design and material. Replacement Cost estimates the costs required to make property with similar uses, applies designs and materials currently used in the market (in some countries, the term “modern equivalent asset” is used to describe structures whose costs are estimated based on replacement)
The total cost of making or procuring property includes direct and indirect costs. If the additional costs are incurred by the buyer after the acquisition, these costs will be added to the historical acquisition costs for cost accounting purposes, these costs can be included in part or in full as the Market Value of the asset, depending on the market’s perception of the use of these additional costs.
Price
The term used for the amount of money requested, offered or paid for an item or service. Concerning valuation, price is a historical factor, both publicly announced and kept secret. Because of the financial ability, motivation, or special interests of a seller or buyer, the price paid for an item or service may be related or not related to the value of the goods or services concerned. (KPUP-SPI 5.2 2013)
From the explanation above, it can be concluded that the price has a function as a measure of the value of an item, how to distinguish an item, determine the amount of goods to be produced and its distribution to consumers.
Following the definition of price described, here are some general price functions:
- Be a reference in calculating the sale value of an item or service.
- To help the transaction activity, where prices that have been formed will facilitate the buying and selling process.
- Appropriate pricing will benefit the seller or producer.
- Being one of the references for consumers in assessing the quality of an item or service.
- Assist consumers in making decisions related to product benefits and consumer purchasing power.
Value
An opinion of the economic benefits of asset ownership, or the price that is most likely to be paid for an asset in exchange, so that value is not a fact. Assets are also defined as goods and services. Value in exchange is a hypothetical price, where the hypothetical value is estimated and determined by the purpose of valuation at a certain time. Value for the owner is an estimate of the benefits to be obtained by a particular party of ownership (KPUP-SPI 5.4 2013)
Characteristics of values:
- If needed
- There is a demand
- There is scarcity
- Can be used as an amount of money
The types of values of many value terms, among others;
- Market Value is an estimate of the amount of money at the valuation date, which can be obtained from a sale and purchase transaction or the exchange of an asset, between an interested buyer buying and a seller interested in selling, in a bond-free transaction, the bid being carried out properly and both parties know, act carefully and without coercion
- Market value for existing users is the market value of an asset based on the continuation of existing use, assuming that the asset can be sold on the open market for current use, but still following the definition of market value regardless of whether the existing usage represents the best and highest use of the asset.
- Investment value is the value of a company or stock (business interest) or interests in a company that is specific to an investor, based on or related to certain requirements of an investor or group of investors
- The forced sale value is the amount of money that may be received from the sale of a property in a relatively short period to meet the marketing period in the definition of market value. In some situations, the forced sale value can involve sellers who are not interested in selling, and buyers who buy by knowing the situation that does not benefit the seller.
- Assessed, rateable, taxable value is a value based on the definition outlined in the applicable laws and regulations relating to the determination, tariffs and or determination of property taxes. Although some laws and regulations may cite market values as the basis of estimates, the valuation methodology that is implied may give different results from market values as defined above. Taxable value is not market value.
- Special Value is a value obtained because the extraordinary element of value exceeds market value. Special values can occur, for example, due to physical, functional, or economic links between property and other properties such as continuous property.
- Net realizable value is the estimated selling price of an asset in a business that runs as normal, less the cost of sales and settlement costs.
- Scrap value is an estimate of the amount of money to be obtained from a sale and purchase transaction of parts/materials of a property (not including land) not for productive use.
Closing Statement
Appraisers must have a good understanding of the differences between cost, price, and value. Understand the interaction of market participants, will able to determine the fair price. That is very likely to be agreed between the buyer and seller of property in the market. Market Value is the type of value most commonly used in property valuations as discussed in SPI 101 – Market Value as the Valuation Base. Although general use may require market understanding that the intended type of value is Market Value. It is still important to clearly define Market Value in each valuation assignment. Likewise, if the intended value is other than Market Value, it must be clearly stated in each appraisal assignment.