- January 13, 2015
- Posted by: RickEberhart
- Category: Auctions, Real Estate
What is value?
First, let me say that when I attend a meeting or a presentation and the speaker starts with a word, followed by the Miriam-Webster definition of that word complete with a recognition of the part of speech that under which that word is categorized I automatically tune out. I roll my eyes, assume the speaker is clueless or just “phoning it in”. I will usually devote my attention to my bland chicken breast, cold green beans or whatever hotel conference room fare was dropped at my place instead of the speaker’s content.
That being said- “Value” is defined by Miriam Webster, for our purpose, as “a fair return or equivalent in goods, services, or money for something exchanged”. There are other meanings of the word, but for this exercise we should just concentrate on “value” as the worth of an item or service represented as a conversion to dollars.
I am an auctioneer. I sell everything from real estate to
antiques to outright junk. I deal with with buyers and sellers every day. Each of these groups, buyers and sellers, has an idea of the intrinsic value of the item offered for sale.
Who determines the value of an item or piece of property?
It’s the buyers. We can call them “the market” or the marketplace of whatever but in the valuation of goods and services,
sellers sometimes have a skewed and sometimes emotional attachment to the item in question.
This is the beauty and purity of the auction method of marketing. The highest bidder sets the value of a particular thing within the confines of the market or group that has an interest in forking over cash for that particular thing. It’s really pretty simple.
Here’s where the purity and perception of the marketplace is obscured; sellers sometimes have a skewed and sometimes emotional attachment to the item in question.
In the real estate world, it is customary to perform a CMA (Comparative Market Analysis) or a BPO (Broker’s Price Opinion) on a particular piece of property. The process involves averaging recent sale prices of similar properties that have sold in the physical area or neighborhood of the subject property. If a CMA is performed correctly, it is usually pretty accurate indicator as to the price-point of the subject property based on the current market.
There are some anomalies, flukes and unforeseen factors that could cause a property to sell at a price not predicted by an accurate CMA but that’s pretty rare. A good CMA performed by an experienced broker or agent, for the most part, is a decent yardstick to measure the value of real estate.
The problem with presenting an accurate estimate to the value of a piece of real estate is the mostly irrelevant and emotional perceptions of the property owner.
For instance- “I paid a whole lot more for this house when I bought it”. Well, the market changes from day to day. In 2006, the real estate market in most of the US experienced a bubble and subsequent drop in valuation and continued to decline through 2012. The buyers- are the ones that set set the price right now. They don’t care nor do they even consider the price you paid for your home in 2005. It’s irrelevant.
“We added granite counter tops that cost us $5000”.
Well, good. That might be an advantage in setting a value for your
My apologies to Uncle Gustav, that’s just how the market works.
Most of the time, the market doesn’t care about the story behind your item.
This is a big one I hear all the time when I sell antiques and similar items. If your great uncle Gustav smuggled a china teacup in his pants, escaped from the German Army in 1942 and stowed away on a freighter bound for New York, it doesn’t add much value to the teacup. A collector will most likely pay for just the cup that similar cups have brought at auction or on eBay in recent weeks or months. My apologies to Uncle Gustav, that’s just how the market works.
As an auctioneer who sells real property and estate items, it is sometimes a difficult part of my job to communicate the reality of the market to customer and sellers of property. It is, however, a necessary part of being diligent, honest and fair with potential clients. The market is what it is. Allowing someone to maintain a false belief of the value of their property or sale item in order to procure them as a customer, in my opinion, dishonest and in some cases fraudulent.
Value is simply the amount of money the market is willing to exchange for something at a particular time. It’s really just that simple.