Cost Appraisals vs Value Appraisals: What Are The Main Differences?

Imagine you decide to get into the picnic table business as a hobby. You figure you can make a basic picnic table in your garage in about an hour. Using white pine and some tinted exterior sealer would make it look nice. You figure the lumber and material costs from the store are about $50. And with your labor included your total cost is about $75 per table. So then you take your creation to the farmers market to sell. It is springtime, so lots of people are fixing up their yards and you have no problem selling your whole inventory of tables for $150 each. Nice! A couple of months go by and you decide to do it again to make some extra money. However, this time it is late fall and the farmer’s market is quiet. You are only able to sell a couple of tables for only $25 each. What happened? Well, in a way you just learned some of the differences between cost and value. Please read on to better understand what we mean..

Price is what you pay. Value is what you get.– Warren Buffet

In our example the cost of the picnic table was constant regardless of the season. However – it’s value fluctuated, mainly due to seasonal changes in demand levels. That is why there are both cost appraisals and there are also value appraisals. They are different. There are also different types of costs and different types of values too.

 

Cost Value Appraisal

What kind of appraisal do I need?

To answer that question we need to know what you are using the appraisal for.

Cost Estimate Appraisals

Say you own a commercial building and you want to make sure you have enough building insurance coverage in place. If that building was destroyed somehow, you would hope that the insurance coverage was based on its cost and therefore you need a cost estimate appraisal. A cost estimate appraisal is one of the services that Suncorp specializes in. We do cost estimate appraisals for all building types including multi-family, commercial and industrial structures.

Market Value Appraisals

Say you decide to sell that commercial building, or maybe you are thinking of taking out a mortgage on it. Well in that case you need a value appraisal, specifically a market value appraisal. This is an estimate of what the property will sell for given current market conditions and you want to be sure that you sell it for at least it’s market value. For mortgage purposes, the bank will want to know market value to ensure that the loan-to-value ratio is appropriate. Suncorp has a team of highly qualified appraisers who specialize in this type of work. We do value appraisals for all building types, as well as machinery and equipment too.

commercial-building

Different Types of Cost

There are a variety of different types of cost. Here are 2 common examples;

– Reproduction Cost New (CRN)

An estimate of the cost to construct an exact duplicate of an existing building.

– Replacement Cost New (RCN)

An estimate of the cost to reconstruct a building using modern materials and standards.

Different Types of Value

There are a variety of different types of values too.

– Market Value

As mentioned, market value is an estimate of what a property/asset may sell for.

– Market Rent

An estimate of what a property may rent for.

– Forced Sale Value or Liquidation Value

An estimate of what a property may sell for under distressed conditions such as during a foreclosure or bankruptcy.

commercial-building-liquidation

There are many factors that affect value that appraisers must consider including competing supply, effective demand levels or trends, exposure and marketing periods, etc. There are many other types of cost and value in addition to these examples. If you are unsure of the type of appraisal service you need, your first call must be to Suncorp Valuations. We have decades of experience with these matters and we are anxious to help you today.

Cost vs. Value Chart

While there may be particular situations where the cost of a particular asset may be equal to its value, this is a rare occurrence. Generally speaking, costs increase steadily over time because of inflation and it is a function of basic material and labor costs. However, although value also tends to increase over time, it is much more volatile and subject to peaks and valleys. This is because value is a function of supply and demand, as well as economic cycles.

cost-vs-value-what-is-the-difference

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multi-lingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

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Arbitration for Real Estate Disputes

The real estate business, by its nature, is complex and therefore ripe for misunderstanding and disagreement.  When there is a dispute, the parties have a choice.  They can go through the public courts which are expensive, time consuming, rigid, and offers no privacy.  Or they can engage the services of a qualified and skilled Real Estate Arbitrator.

Arbitration for Real Estate Disputes

POP QUIZ:  You are a busy business owner.  You are ten years into a 20 year lease for the building that your business operates out of.  The lease has a clause that the rental rate renews at “Market Rent” every five years.  It is renewal time.  Your landlords’ appraiser says that your rent is to go from $15,000/month, to $21,000/month plus all occupancy and common area costs, for the next five years.  But your appraiser says that Current Market Rent is actually $17,000/month plus utilities only.  What do you do?

WHAT ARE THE BENEFITS OF ARBITRATION?

Arbitration is a private dispute resolution service.  As compared to the public courts, arbitration has five significant advantages including speed, cost, privacy, flexibility, and expertise.

Faster:  Disputes going through the public court system can often take many years.  The courts are a public institution that typically has a backlog of cases with long wait times.  An arbitration on the other hand is much faster, often completed within a few months.  That is important, because time is money.

Cheaper:  Arbitrations are very cost effective as compared to the expense of a public trial which may often cost in the tens to hundreds of thousands of dollars.  The cost of a particular arbitration depends on the scope and complexity of the issues, however it is often a fraction of the cost of a court action.

Private:  The privacy advantage of an arbitration is often very attractive to many parties especially when the nature of the dispute is sensitive, or some evidence is confidential or proprietary.  The arbitrator is bound by confidentiality and ethics rules to not disclose any details of the dispute, or even that there is a dispute.

Flexible:  The public courts have rigid procedures including the rules of court and the rules of evidence.  The procedures for an arbitration however can be custom designed for the particular nature of each dispute.  For example, for some disputes a fast track “documents only” arbitration may be appropriate.

Expertise:  In the public court system judges are assigned at random.  However, with an arbitration the parties choose the decision maker.  Parties often engage a qualified arbitrator (Q.Arb or C.Arb) that also has additional specialized qualifications, such as an professional appraiser (AACI or CRA) to arbitrate real estate disputes.

ENFORCEABILITY

Arbitration awards are enforceable.  Provided that all procedures were correctly followed by the arbitrator an arbitration award is often legally enforceable by the courts, very much like a judgement.

POP QUIZ:  You are an investor and you have hired a general contractor to build an apartment building for you.  Your payments to the general contractor are due at certain stages of completion.  The contract says that “a payment of $175,000 is due once the project reaches 25% complete.”  The general contractor says they are at 26% and they want their money now.  You say no, it is at 15% because it isn’t correct to include the delivered but uninstalled material in the percent complete calculation.  Construction has stopped until this dispute is settled.  What do you do?

 

WHAT KIND OF REAL ESTATE DISPUTES CAN BE ARBITRATED?

A Real Estate Arbitrator can help with just about any type of real estate dispute, such as:

  • Lease disputes including interpretation of clauses, rental rate renewals and terms, common area expense allocations, etc.
  • Disputes regarding the interpretation and enforcement of condo/strata rules and regulations.
  • Disputes involving market value, market rent, or other types of value or cost estimates.
  • Issues relating to the allocation of value or cost, such as during creation or dissolution of partnership agreements or other types or shared equity arrangements.
  • Disputes relating to tangible or intangible real estate or property damages and claims.
  • Family disputes over the shared ownership of assets such as cottages, farmland, or revenue properties.

HOW DO I GET STARTED?

If all parties to the dispute are open to arbitration then the first step is to engage a qualified and skilled Real Estate Arbitrator.  A professional with the Q.Arb or C.Arb designation is trained and qualified in all aspects of arbitration services.

It is recommended that your Real Estate Arbitrator also has expertise in the real estate industry.   For example, a qualified real estate appraiser (AACI or CRA) has in-depth training and years of experience in all types of real property valuation issues, as well as expertise in a wide variety of real estate consulting and advisory services.  AACI’s and CRA’s are bound by very strict ethical standards which ensure objectivity and confidentiality.

Once you have engaged a qualified and skilled Real Estate Arbitrator the next step is for the parties and the arbitrator to develop an Arbitration Agreement which establishes the scope, jurisdiction, and procedures for the arbitration.

POP QUIZ:  You are a tenant in a condo/strata strip mall.  Your unit is open storage space only, and all the other units are fully developed offices.  The leases say each tenant must pay “…a proportionate share of the total property tax…”  You think “proportionate” means that the tax bill is divided up based on the assessed value of each unit, and on that basis your share of the tax bill is $3,500/year.  However your landlord and all the other tenants say no, the total tax bill is divided up equally based on occupied square feet, and on that basis your share of the tax bill is $7,500/year.  What do you do?

Real estate disputes are often very complex and can involve a lot of money.  Do you have the time and patience to wind your way through the public courts for all to see?  Or would you be better served to engage the services of an objective, qualified and skilled Real Estate Arbitrator from Suncorp Valuations that has expertise in the real estate industry and speaks your language?

 

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

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