Cost vs. Value

 

One of the biggest problems you face in obtaining top dollar for your property is determining your house’s value.  The problem of determining value occurs primarily because sellers and buyers alike use 3 little words:  price, cost and value interchangeably.  A lack of understanding regarding the meaning of these words and their use causes communication breakdowns and allows emotion to replace objectivity during price negotiations.

The fact is, neither cost nor price is the same as value.

Value is elusive.  It is your opinion of your house’s worth to you based on the way you use it now and plan to use it in the future.  Interesting – the words “you” and “your” both appear twice in the preceding sentence.  Because your opinion is subjective the features you value may not be the standard for all people.

Two factors affect value:

  • Internal:  Your personal (internal) situation is the first factor and it changes over time.  Let’s illustrate – suppose you were a growing family buying a house 15 years ago.  You would most likely have put great value on such things as 4 bedrooms, a huge yard and a great school system.  But now, 15 years later, your family is grown.  You don’t need 4 bedrooms, a yard or that terrific school system.  The house didn’t change – your personal (internal) use for that house did.  Thus, its value to you changed.  It’s the internal factors in people’s lives that compel them to buy and sell property.
  • External:  These are the circumstances outside of your control that affect value – for better or worse.  If, for instance, a major 8 lane toll road is proposed to cut through your neighborhood your property value could take a hit.  On the other hand, if a Marta Station is coming to your neighborhood that could decrease your commute to work from 1 hour to 20 minutes your value may increase.  The law of supply and demand is a huge external factor that affects value.  If there are more buyers than houses, the value goes up.   If more people want to sell than there are buyers, value goes down.

Cost is history.  Cost measures past expenditures.  But that was then and this is now.  What you paid for your house then or the cost of maintaining it doesn’t mean anything as far as the present or future value of your house is concerned.

Why?  Markets can and do change dramatically.  During the 70’s and 80’s property values soared and people made huge profits upon resale because demand (due to relocation) was so great.  During the early 90’s prices leveled off or in some cases even declined.  Unfortunately, many sellers realized little to no profit upon selling.  Some even lost money.  Your potential profit or loss as a seller doesn’t enter into the equation when determining your house’s present value. 

Price is here and now.  You put an asking price on your house.  The buyer puts an offering price in their offer.  You and the buyer negotiate back and forth until you arrive at a mutually acceptable purchase price.  Today’s purchase price becomes tomorrow’s cost.

Remember, cost is past, price is present and value is in the eye of the beholder.  Neither the price you paid nor the price you want to get matters to the buyer.

Not understanding this often causes sellers to make a very common mistake – overpricing.