2.4 Types of Value; Cost vs Price vs Value

Start With the Assignment: Which Value?

Area I of the AQB National Exam Content Outline requires knowledge of types of value and the distinctions among cost, price, and value, plus allocation of value between intangible property and real estate. USPAP and client needs determine the type of value; the appraiser does not freely substitute one type for another because the numbers “look close.”

Most residential lending assignments seek an opinion of market value. Commercial work more often involves investment value, going concern issues, or specialized definitions in statutes and contracts. On the exam, read the stem for the value premise before you compute anything.

Market Value

Market value is the type of value most often associated with arm’s-length transfer between typical market participants under conditions consistent with a competitive and open market, as of a specified date. Exact definitional wording can come from a regulation, client, or jurisdiction, but the concept centers on:

• A willing buyer and willing seller, typically motivated
• Adequate marketing exposure
• Payment in cash or its equivalent / typical financing
• Parties acting prudently and knowledgeably
• A price not affected by undue stimulus

Exam use: Unless the question specifies another value type, default reasoning tracks market value. Comparable sales must be scrutinized for conditions of sale, financing, and motivation that may take them outside market-value conditions.

Illustration: A parent sells a house to an adult child for 40% below recent neighborhood sales “to keep it in the family.” That price is not good evidence of market value without major adjustment or rejection, because the parties were not typically motivated market participants.

Value in Use

Value in use (use value) is the value a specific property has for a particular use to a specific user, which may differ from the value in exchange (market value) under highest and best use.

When it appears: Special-purpose properties, owner-occupied manufacturing plants, or properties where the current user derives benefits not fully transferable to the open market.

Illustration: A specialized food-processing plant has machinery pits, reinforced floors, and process layout that are highly useful to the current operator. Market value for conversion to general warehouse use might be lower than the plant’s value in use to that operator. The appraisal problem is to identify which value the client needs and not blur them.

Investment Value

Investment value is the value of a property to a particular investor based on that investor’s individual investment criteria—required yield, tax situation, financing, risk tolerance, and holding period—not necessarily the criteria of the market at large.

Contrast with market value: Market value reflects the most probable price in the broader market of typical participants. Investment value can be higher or lower than market value for the same property on the same date.

Illustration: Investor A requires a 6% overall yield and can use tax-exempt financing; Investor B requires 9% with conventional debt. Their investment values for the same apartment property diverge even though market value is a single opinion based on typical market participants.

Going Concern Value

Going concern value is the value of a proven property operation as an established business—including real property, personal property, and intangible assets such as business enterprise value, trained workforce, licenses, brand, and residual goodwill—when the business is expected to continue.

Critical distinction: An appraisal of real property only is not automatically a going-concern appraisal. Hotels, restaurants, car washes, senior care facilities, and fueled convenience stores often involve going-concern issues because buyers purchase an operating business integrated with the realty.

Illustration: A limited-service hotel sells for $12,000,000 as an operating business. That price may include real estate, furniture/fixtures/equipment (FF&E), and intangible business assets. Reporting $12,000,000 as “real estate market value” without allocation would misstate the real property component.

Ad Valorem / Assessed Value

Ad valorem taxation values property for tax purposes. Assessed value is the value placed on the assessment roll, which may be market value, a fraction of market value, or another statutory basis depending on jurisdiction. Assessment ratios, exemptions, and equalization practices vary widely.

Exam traps:

• Assessed value is not automatically equal to market value.
• Mass appraisal for taxation uses different processes than a single-property market value appraisal for a mortgage.
• Appealing an assessment and appraising for a sale are related but not identical assignments.

Illustration: A county assesses at 80% of estimated market value. A home with a $400,000 market value opinion might show a $320,000 assessed value. Citing the assessed figure as market value on a private sale listing would be incorrect.

Liquidation Value and Disposition Value

These related concepts involve compelled or time-constrained transfer, not a full market-exposure market value premise.

Exact labels and definitions may be supplied by the client or a standard of practice; the exam cares that you recognize restricted marketing time and compulsion produce prices below market value for the same property on the same calendar day.

Illustration: A lender orders a market value appraisal ($500,000) and, separately, asks what price is likely if the REO must close within 45 days in a market where similar homes average 120 days of exposure. The time-constrained figure is not the same value type as market value.

Insurable Value

Insurable value relates to the amount of insurance that should be carried on the destructible portions of the property—typically improvements and sometimes specific site improvements—not the land (land is not destroyed by fire in the usual sense). Definitions may track replacement cost for insurance purposes, often excluding land and certain below-grade items depending on policy forms.

Contrast: Market value includes land and reflects depreciation and market conditions. Insurable value is cost-oriented for risk transfer, not an exchange value for the whole property rights package.

Illustration: A property’s market value is $1,200,000 (land $400,000 + improvements contributory $800,000). An insurer may write coverage based on a $950,000 replacement cost new of the building structure under policy terms—neither the land amount nor the full market value.

Cost vs Price vs Value

The outline explicitly tests cost vs. price vs. value. Treat these as three different ideas:

Relationships:

• Cost can exceed value (overimprovement, poor design, declining market).
• Price can differ from value (duress, related parties, poor exposure, or simply negotiation variance around value).
• Value is never “the cost” by definition; the cost approach estimates value using cost minus depreciation plus site value, which is a method—not a redefinition of value as cost.

Scenario integrating all three: A builder’s total production cost for a speculative home (including entrepreneurial incentive) is $520,000. The home sells in an arm’s-length sale for $495,000 (price). An appraiser’s market value opinion as of the sale date, well supported by substitutes, is also $495,000 (value). Cost exceeded value/price because the market would not fully reward that production cost—decreasing returns / lack of balance / weak demand.

Allocation Between Intangible Property and Real Estate (ECO I.d)

When a transaction or assignment includes both real property and non-realty items (personal property, financial assets, or intangible business assets), the appraiser must identify what is included and, when the purpose requires it, allocate the total among components.

Why it matters:

• Mortgage lending often underwrites real property collateral, not the full going concern.
• Financial reporting, condemnation, and tax problems may need separate realty vs. non-realty opinions.
• Cap rates and sale prices drawn from going-concern sales are not automatically pure real-estate indicators.

Practical allocation tools (conceptual level for this chapter):

1. Identify assets included: real property rights, FF&E, inventory, licenses, workforce, brand, residual goodwill.
2. Use market extraction where possible: compare turnkey going-concern sales to real-estate-only sales of similar facilities.
3. Cost and depreciation analyses for FF&E; income techniques that isolate business enterprise value when appropriate.
4. Disclose the allocation clearly so users do not treat a blended number as pure real estate value.

Worked micro-example: A car wash sells for $2,400,000 including real estate, equipment, and a transferable membership book (intangible). Equipment is estimated at $350,000 depreciated value and the membership/business intangible at $250,000 by residual after supporting a real estate value of $1,800,000 from land and building analysis. The $2,400,000 is a total assets / going-concern type price; the real estate component is $1,800,000. Using the $2,400,000 unadjusted as a pure real estate comparable for a vacant former car wash building would distort the sales comparison approach.

Choosing the Right Value Type (Decision Table)

Common Exam and Practice Errors

1. Equating assessed value with market value without checking the jurisdiction’s assessment ratio and methods.
2. Reporting going concern sale prices as real estate only comparables.
3. Calling cost “value” because a builder has invoices.
4. Treating a single price as conclusive proof of value without testing conditions of sale.
5. Using investment value conclusions for a market value assignment (or the reverse) without disclosure and agreement on scope.

Tie-Back to Earlier Sections

• Factors of value explain why market value exists in a competitive market.
• Forces on value explain why market value changes over time and across locations.
• Principles (especially substitution and anticipation) underwrite how market value is estimated.
• Types of value tell you which target those tools are aimed at.

On the AQB National Exam, a stem that mentions a bank foreclosure timeline, an insurer, a tax appeal, a particular investor’s yield requirement, or a hotel sold as an operating business is often testing whether you can name the correct value concept—not whether you can grind a calculator drill. Identify the value type first; then select methods and data consistent with that type.